TREASURIES-U.S. Treasury yields drop as job market shows signs of weakness

By Karen Brettell

NEW YORK, Feb 5 (Reuters) - U.S. Treasury yields fell on Thursday and two-year yields hit a four-week low as two economic releases pointed to a weaker than expected jobs market ahead of next week's highly anticipated payrolls report for January.

The number of Americans filing new applications for unemployment benefits increased more than expected last week amid winter storms, while job openings fell to a more than five-year low in December.

"There are some signs that the labor market is not on great footing," said John Luke Tyner, head of fixed income and portfolio manager at Aptus Capital Advisors in Fairhope, Alabama.

January's payrolls report, which was delayed to next Wednesday due to the four-day partial government shutdown that ended on Tuesday, is the next major jobs focus.

It 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%.

The market could view the data skeptically in lieu of the government shutdown delay, but "if you see a big spike in the unemployment rate, it's not going to be loved by the market," Tyner said, adding that this could lead traders to price in more interest rate cuts.

Traders currently see two 25 basis-point interest rate cuts this year, with the first seen likely in June.

The 2-year note US2YT=RR yield, which typically moves in line with Federal Reserve interest rate expectations, fell 7.8 basis points to 3.481%. The yield on benchmark U.S. 10-year notes US10YT=RR fell 7.2 basis points to 4.206%. Both maturities registered their biggest one day drop in yields since October.

The yield curve between two-year and 10-year notes steepened to 72.7 basis points and earlier reached 73.7 basis points, its steepest level since April.

Treasury yields had been pushing up against the high end of their recent ranges, which likely provided some technical support for today’s bond rally.

"There's nothing until Wednesday's job report that I would think would cause a bearish breakout," said Will Compernolle, macro strategist at FHN Financial in Chicago.

Traders are balancing the risks of a weakening jobs market against a solid growth outlook and ongoing concerns from Fed policymakers over a resurgence in inflation.

The U.S. central bank is seen as taking on a more dovish tilt when former Fed governor Kevin Warsh takes over as Fed chair after Jerome Powell’s term ends in May. Warsh had a reputation as an inflation hawk in his earlier stint at the Fed, but now advocates for rates to be lowered.

Warsh has also argued that large Fed holdings distort finances in the economy, which has created some uncertainty over what policies he is likely to pursue. A smaller U.S. central bank balance sheet would tighten financial conditions.