TREASURIES-US yields jump after stronger-than-expected jobs report

By Chuck Mikolajczak

NEW YORK, Feb 11 (Reuters) - U.S. Treasury yields shot higher on Wednesday, after a report on the labor market handily topped expectations and dampened views the Federal Reserve could have the cushion for a rate cut.

The Labor Department said nonfarm payrolls increased by 130,000 jobs in January after a downwardly revised 48,000 rise in December, topping the estimate of economists polled by Reuters that called for a 70,000 increase.

In addition, the unemployment rate fell to 4.3% last month from 4.4% in December.

"It was definitely a surprise this morning to see the numbers be this strong, including not only the number of jobs added, but the unemployment rate declining and the average hourly earnings increasing, so it's just kind of like a good report all the way around," said JoAnne Bianco, partner and senior investment strategist at BondBloxx Investment Management in Chicago.

"There were a lot of things that were causing the market to be less optimistic coming into the nonfarm payroll numbers today."

Market expectations that the Federal Reserve could have leeway to reduce rates in the near-term had been creeping higher this week, after a soft retail sales report signaled consumers were dialing back spending, and White House economic adviser Kevin Hassett on Monday tempered expectations on job gains in the coming months, citing slower labor force growth and higher productivity.

The yield on the benchmark U.S. 10-year Treasury note US10YT=TWEB rose 3.5 basis points to 4.18% after hitting a session high of 4.206%.

After a solid auction of $58 billion in three-year notes US3YT=RR on Tuesday, more supply will come to the market this week as the Treasury will auction $42 billion in 10-year notes on Wednesday and $25 billion in 30-year bonds on Thursday.

The yield on the 30-year bond US30YT=TWEB rose 2.2 basis points to 4.81% after reaching 4.834%.

Market expectations for a Fed cut of at least 25 basis points at the central bank's March meeting had risen to about 20% before the jobs data, sinking back to a roughly 6% after the report, according to CME's FedWatch Tool.

Expectations for a cut at the June meeting, the first meeting pricing in more than a 50% chance for a reduction of at least 25 basis points, dipped to 60.5% from 75.2% on Tuesday.

A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes US2US10=TWEB, seen as an indicator of economic expectations, was at a positive 66.0 basis points.

Fed officials scheduled to speak on Wednesday include Bank of Kansas City President Jeffrey Schmid, Vice Chair for Supervision Michelle Bowman and Bank of Cleveland President Beth Hammack.

The two-year US2YT=TWEB U.S. Treasury yield, which typically moves in step with interest rate expectations for the Fed, rose 6.4 basis points, on track for its biggest daily jump since October 29, to 3.518%.

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) US5YTIP=TWEB was last at 2.514% after closing at 2.491% on February 10.

The 10-year TIPS breakeven rate US10YTIP=TWEB was last at 2.335%, indicating the market sees inflation averaging about 2.3% a year for the next decade.