TREASURIES-US Treasury yields fall as jobless claims rise unexpectedly

By Karen Brettell

NEW YORK, Feb 5 (Reuters) - U.S. Treasury yields fell on Thursday after data showed the number of Americans filing new applications for unemployment benefits rose more than expected last week, with traders waiting on January's jobs report next week for the next big clue on the strength of the labor market.

Initial claims for state unemployment benefits jumped 22,000 to a seasonally adjusted 231,000 for the week ended January 31, the Labor Department said on Thursday.

"This is a bit of an acceleration, but in the greater context, there's still a really low level of job separations," said Will Compernolle, macro strategist at FHN Financial in Chicago.

Benchmark 10-year Treasury yields have been pushing up against five-month highs, reaching an area that likely provided technical support for today’s bond rally.

For now, "I don't think really until the jobs report next Wednesday would there be an obvious catalyst... to break out from the range we've seen," Compernolle said.

The 2-year note US2YT=RR yield was last down 5.5 basis points at 3.504%. The yield on benchmark U.S. 10-year notes US10YT=RR fell 4 basis points to 4.238%.

January's payrolls report, which was delayed to next Wednesday due to the four-day partial government shutdown that ended on Tuesday, is expected to show employers added 70,000 jobs last month, according to the median estimate of economists polled by Reuters.

The unemployment rate is expected to remain steady at 4.4%.

Traders are pricing in expectations of two 25 basis-point interest rate cuts this year on concerns about a weakening labor market.

The Federal Reserve is also seen as taking on a more dovish tilt when former Fed governor Kevin Warsh takes over as Fed chair when Jerome Powell’s term ends in May.

Concerns over a weakening labor market come as economic growth is seen as likely remaining solid and as Fed policymakers remain concerned about inflation.

That is helping to steepen the U.S. yield curve, with the two-year, 10-year part of the yield curve reaching 73.4 basis points on Thursday, its steepest level since April.

Shorter-dated yields are sensitive to interest rate policy, while longer-dated yields react to growth and fiscal expectations.

Traders are also evaluating Warsh’s likely policies when he takes over as Fed chair.

Warsh had a reputation as an inflation hawk in his earlier stint at the central bank, but now advocates for rates to be lowered.

He has also argued that large Fed holdings distort finances in the economy, and any efforts to reduce the size of the U.S. central bank’s balance sheet would tighten financial conditions.