TREASURIES-US yields mixed as data distortions cloud jobs picture

NEW YORK, Dec 16 (Reuters) - U.S. Treasury yields were mixed on Tuesday with benchmark 10-year note yields reversing an earlier drop as traders attributed an unexpected increase in the unemployment rate last month to possible government shutdown-related distortions.

Employers added 64,000 jobs last month, above economists’ expectations for 50,000 in jobs gains. The unemployment rate rose to 4.6%. Economists polled by Reuters had forecast the rate would remain unchanged on the month at 4.4%.

"I don't think there's much signal we can get from today," said Will Compernolle, a macro strategist at FHN Financial in Chicago.

"The most important thing I would say is the rise in the unemployment rate to 4.6%. But even there, if you look at the BLS report, they have a technical note that says for a number of reasons the margin of error for November is higher," Compernolle said.

The delayed employment report for November and a partial update for October published by the Labor Department's Bureau of Labor Statistics (BLS) on Tuesday also did not include the unemployment rate and other metrics for October after the 43-day shutdown of the government prevented the collection of data from households.

“It looks like the labor market is still gradually cooling rather than showing an acceleration in deterioration. So, I don't think this data overall changes our understanding of how the economy is doing or how the Fed is going to react to it,” Compernolle said.

The two-year note US2YT=RR yield, which typically moves in step with Federal Reserve interest rate expectations, was last down 0.2 basis points on the day at 3.506%. The yield on benchmark U.S. 10-year notes US10YT=RR rose 1 basis point to 4.192%.

The yield curve between two- and 10-year notes US2US10=TWEB steepened to 68.4 basis points, the steepest since April 9.

A sharply divided Federal Reserve cut interest rates last week but signaled borrowing costs are unlikely to drop further in the near term as it awaits clarity on the direction of a job market showing signs of softening, inflation that "remains somewhat elevated" and an economy it sees picking up steam next year.

Fed funds futures traders are pricing in only 27% odds of a rate cut at the Fed’s January 27-28 meeting, with the next cut seen likely in April.

Other data on Tuesday showed that U.S. retail sales were unexpectedly flat in October, although consumer spending appears to have remained on a solid footing at the start of the fourth quarter despite the rising cost of living that is forcing some households to scale back.