TREASURIES-US Treasury yields drop as traders await key jobs data

By Karen Brettell

NEW YORK, Jan 5 (Reuters) - U.S. Treasury yields fell on Monday as traders readied for new data that should offer fresh clues on the state of the U.S. economy and the likely path of Federal Reserve policy, culminating in Friday's jobs report for December.

Economic releases for the past few months have been clouded by data collection issues following the 43-day federal government shutdown.

As those effects pass, traders will be focused in particular on the state of the labor market and whether inflation is showing reliable signs of easing from still elevated levels.

"Some cleanliness in the data will be very much appreciated by markets," said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities in New York.

This week’s main U.S. economic focus will be December's jobs report, which is expected to show that employers added 60,000 jobs during the month, according to the median estimate by economists polled by Reuters.

The focus will also be on the unemployment rate after November’s data showed an unexpected increase in the rate to a four-year high of 4.6%.

"I think the market's going to be most focused on the unemployment rate and we're looking for that to fall to about 4.5%," said Goldberg.

"We expect stability around somewhat softer levels, maybe some marginal deterioration over time, but nothing to really suggest that the U.S. is entering a recession imminently or that the labor market is really softening further from here."

Data on Monday showed that U.S. manufacturing activity contracted more than expected in December , extending its slump to 10 straight months as new orders fell again and input costs kept grinding higher.

Fed funds futures traders are pricing in only a small chance of a cut in January, with 54% odds of a cut priced in for March.

A sharply divided Fed cut interest rates last month 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 this year.

Minneapolis Federal Reserve President Neel Kashkari on Monday said inflation is slowly trending down , but there is a risk the jobless rate could "pop" higher.

The 2-year note US2YT=RR yield, which typically moves in step with Fed interest rate expectations, was last down 2.2 basis points on the day at 3.455%. The yield on benchmark U.S. 10-year notes US10YT=RR fell 2.6 basis points to 4.163%.

The yield curve between two- and 10-year notes US2US10=TWEB was little changed on the day at 71 basis points.

Markets will also be focused on corporate debt supply, with January typically being a busy month for corporate bond issuance.

Investors are also focused on the prospect of rising geopolitical tensions after U.S. President Donald Trump's administration captured Venezuelan leader Nicolas Maduro. Maduro pleaded not guilty on Monday to narcotics charges in a New York federal court.