(Updated at 1005 EDT)

By Karen Brettell

NEW YORK, Sept 6 (Reuters) - Benchmark 10-year Treasury

yields turned higher on Friday after earlier reaching a 15-month

low, as August's payrolls report failed to offer a clear signal

on the size of an expected Federal Reserve interest rate cut

later this month.

Nonfarm payrolls increased by 142,000 jobs last month after

a downwardly revised 89,000 rise in July. Economists polled by

Reuters had forecast payrolls increasing by 160,000 jobs.

The unemployment rate fell to 4.2%, from 4.3% the prior

month.

"I think the market's really struggling with this one

because it's really in the middle of what could be used as a

justification for either a 25 or 50 basis point rate cut," said

Gennadiy Goldberg, head of U.S. rates strategy at TD Securities

in New York.

U.S. 10-year Treasury yields were last up 0.9

basis point at 3.742% and earlier fell as low as 3.657%, the

lowest since June 2023.

Interest rate-sensitive two-year yields fell 1.5

basis points to 3.737% and reached 3.642%, the lowest since

March 2023.

The closely watched yield curve between two- and 10-year

notes was at 0.1 basis point and reached 3.4

basis points, the steepest since July 2022.

The bond market is pricing in an aggressive path of rate

cuts over the coming year and a half, even as many economists

see the U.S. avoiding a recession.

Fed funds futures traders are now pricing a 61% chance of a

25 basis point cut at the Fed's Sept. 17-18 meeting, and a 39%

chance of a 50 basis point reduction, according to the CME

Group's FedWatch Tool.

In total 240 basis points of cuts are priced in by the end

of 2025.

""The payroll report suggests there is no reason for the

Federal Reserve to rush," said Drew Matus, chief market

strategist at MetLife Investment Management in New Jersey. "The

labor market is slowing, but at a slow pace, allowing the Fed to

move more deliberately in September."

Some of the underlying details of Friday's report, including

downward revisions of 86,000 jobs gains for the past two months,

however, may be a warning that the labor market is not as

healthy as hoped.

"We do see the labor market really not just coming into

balance, but really starting to cool off quite significantly,

which could make the Fed quite nervous," said TD's Goldberg.

New York Fed President John Williams said Friday that a

better balanced economy has opened the door to cutting rates,

with the full course of action to be determined by how the

economy performs.