(Updated in New York afternoon time)

*

Unemployment rate rises, data clouded by government

shutdown

distortions

*

Economists expected 50,000 jobs, actual increase was

64,000

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Fed unlikely to cut rates soon, awaits job market clarity

By Karen Brettell

NEW YORK, Dec 16 (Reuters) - U.S. Treasury yields fell

on Tuesday after data showed an unexpected increase in the

unemployment rate last month, though analysts also noted that

the data is less reliable than usual due to government

shutdown-related distortions.

Employers added 64,000 jobs last month, above economists'

expectations for 50,000. The unemployment rate rose to 4.6%.

Economists polled by Reuters had forecast the rate would remain

unchanged on the month at 4.4%.

"I don't think there's much signal we can get from today,"

said Will Compernolle, a macro strategist at FHN Financial in

Chicago.

"The most important thing I would say is the rise in the

unemployment rate to 4.6%. But even there, if you look at the

BLS report, they have a technical note that says for a number of

reasons the margin of error for November is higher," Compernolle

said.

The delayed employment report for November and a partial update

for October published by the Labor Department's Bureau of Labor

Statistics (BLS) on Tuesday also did not include the

unemployment rate and other metrics for October after the 43-day

shutdown of the government prevented the collection of data from

households.

"It looks like the labor market is still gradually cooling

rather than showing an acceleration in deterioration. So, I

don't think this data overall changes our understanding of how

the economy is doing or how the Fed is going to react to it,"

Compernolle said.

The two-year note yield, which typically moves in

step with Federal Reserve interest rate expectations, was last

down 2.3 basis points on the day at 3.485%. The yield on

benchmark U.S. 10-year notes fell 2.7 basis points

to 4.155%.

The yield curve between two- and 10-year notes

was little changed on the day at 67 basis points.

A sharply divided Fed cut interest rates last week 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 next year.

Fed funds futures traders are pricing in only 24% odds of a

rate cut at the Fed's January 27-28 meeting, with the next cut

seen likely in April.

Other data on Tuesday showed that U.S. retail sales were

unexpectedly flat in October, although consumer spending appears

to have remained on a solid footing at the start of the fourth

quarter despite the rising cost of living that is forcing some

households to scale back.

The next major U.S. economic release will be consumer price

inflation data for November due on Thursday.

Traders are also waiting to see who U.S. President Donald

Trump names as the next Fed Chair to replace Jerome Powell when

his term ends in May.

Both Kevin Warsh and Kevin Hassett are qualified to lead

the Federal Reserve, U.S. Treasury Secretary Scott Bessent said

on Tuesday, adding that any candidate President Donald Trump

picks for the job needs to have

"an open mind"

.

Trump is also set to interview Federal Reserve governor

Christopher Waller for Fed chair on Wednesday, The Wall Street

Journal reported on Tuesday, citing people familiar with the

matter.