TREASURIES-Treasury yields hit 3-month low in aftermath of jobs report, Fed resignation

By Ankur Banerjee

SINGAPORE, Aug 4 (Reuters) - U.S. Treasury yields slipped to their lowest in three months on Monday on expectations the Federal Reserve would cut interest rates as soon as September after a weak jobs report, and as investors weighed the surprise resignation of a Fed governor.

U.S. President Donald Trump fired a top Labor Department official on Friday after the employment market data showed weak jobs growth, while the departure of Fed Governor Adriana Kugler offered Trump the chance to reshape the Fed.

U.S. two-year yields US2YT=RR, which are tied to the Fed's monetary policy, hit 3.659% in early trading on Monday, the lowest since May 1. Yields dropped 24 basis points (bps) on Friday, their largest daily fall in a year.

The benchmark 10-year yield US10YT=RR was steady at 4.245%, hovering close to Friday's five-week low.

Data on Friday showed that U.S. employment growth was weaker than expected in July while the nonfarm payrolls count for the previous two months was revised down by 258,000 jobs, stoking investor concern about the integrity of economic data and the Fed’s ability to read the true state of the economy.

Investors responded by increasing the odds of the Fed resuming interest rate cuts from its next meeting in September. Traders are pricing in an 82.5% chance of a rate cut now, compared to 61% a week earlier, CME FedWatch's tool showed.

"With two dissenters to the Fed hold decision at the recent Fed meeting, the pressure intensifies for the Fed to consider a more dovish monetary policy," said Harun Thilak, head of global capital markets at Validus Risk Management.

Fed Governor Christopher Waller and Fed Vice Chair for Supervision Michelle Bowman were two dissenting governors to last week's decision by the Federal Reserve Open Committee to keep rates unchanged in the 4.25%-4.50% target range.

They said on Friday they did so largely due to rising concerns about the job market, in statements made public just ahead of the release of hiring data that bolstered their position.

Mansoor Mohi-uddin, chief macro strategist at Bank of Singapore, expects the Fed to wait for more data, noting that inflation was rising while weak payrolls growth could be due to both lower demand for and supply of labour.

"But the risks of earlier rate cuts are rising, weakening the USD while keeping Treasury yields volatile," he said.

Kugler did not attend last week's rate-setting meeting and will leave the central bank on August 8 to return to Georgetown University as a professor. Trump will select a governor to replace Kugler for the remainder of her term, which was scheduled to end on January 31, 2026.

The greenback recovered some of its losses against the Japanese currency on Monday, last trading 0.26% higher at 147.78 yen JPY=EBS. The euro EUR=EBS fell 0.14% to $1.1569 EUR=EBS. Against a basket of currencies, the dollar =USD edged up 0.15% to 98.813, after sliding more than 1% on Friday.