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U.S. 10-year yield falls to lowest since December

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U.S. two-year yield drops below 4% for 1st time since May

2023

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U.S. 2/10 yield curve is least inverted since July 2022

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U.S. rate futures price in 122 bps cut this year

(Adds new comment, more milestones for different maturities,

graphic, updates prices)

By Gertrude Chavez-Dreyfuss

NEW YORK, Aug 2 (Reuters) - U.S. Treasury yields dropped

to multi-month lows on Friday, after data showed the world's

largest economy created fewer jobs than expected in July,

boosting expectations of multiple rate cuts by the Federal

Reserve this year.

The U.S. 10-year yield dropped as low as 3.79%, the lowest

since December, and was last down 16.3 basis points (bps) at

3.814%. It was on track for its largest daily drop

since December 2023. On the week, it sank 38.5 bps, the largest

weekly fall since March 2020.

U.S. two-year yields, which track interest rate

expectations, fell below 4% for the first time since May 2023.

They were last at 3.881%, down 28.3 bps, on pace for

the biggest daily fall since March last year.

On the week, 2-year yields stumbled 50.1 bps, the

largest weekly decline since March 2023 as well.

Friday's data showed that nonfarm payrolls increased by

114,000 jobs last month after rising by a downwardly revised

179,000 in June. Economists polled by Reuters had forecast

payrolls advancing by 175,000 jobs after gaining 206,000 in the

previous month.

The unemployment rate ticked up to 4.3%.

The U.S. rate futures market is now pricing in an 80% chance

of a 50 basis point cut at the September meeting, up from 20%

late on Thursday. The market has also priced in about 122 bps in

cuts this year, from 75 bps on Thursday.

"A 50 basis-point Fed cut in September is clearly justified

as the labor market is now showing clear signs of softening,"

wrote Yung-Yu Ma, chief investment officer at BMO Wealth

Management, in emailed comments.

"The Fed is already falling behind the curve and rates

are overly restrictive - a 50 basis-point cut in September would

only be catching-up to, rather than getting ahead of, the

curve."

The closely watched U.S. two-year/10-year yield curve

narrowed its inversion, or steepened, to minus 5.7 bps

, the least inverted since July 2022. It was last

at minus 9.8 bps.

The curve has bull-steepened following the jobs report,

which means that short-dated rates were falling more sharply

than longer-dated ones. Yield curves historically steepen ahead

of a Fed easing cycle, as investors price in the fact that rates

on the short end of the curve have peaked given that the next

move by the Fed would be a rate cut.

A steeper curve shows higher longer-dated yields than those

on shorter maturities, reflecting a normal upward slope.

"If (Fed Chair Jerome) Powell knew then what he knows now,

he probably would have cut rates. By keeping rates on hold while

inflation fell, they've applied too much pressure on the

brakes," said Brian Jacobsen, chief economist at Annex Wealth

Management in Menomonee Falls, Wisconsin.

"The decline in hours for the manufacturing work week is not

a good sign for this being just a soft patch. The Fed can't bank

on economic momentum bailing them out from being too slow to

recognize how quickly things are changing."

In other maturities, U.S. three-year and five-year yields

slid to their lowest since May last year. The three-yield was

last down 23.8 bps at 3.733%, while the five-year

yield fell 19.2 bps to 3.652%.

The seven-year yield declined to its lowest since June

last year and was last down 17.2 bps at 3.712%.

On the longer end of the curve, U.S. 20-year bond yields

tumbled to a six-month low. They last traded down 12.8 bps at

4.215%.

U.S. 30-year yields also stumbled to a six-month trough.

They last fell 13.9 bps to 4.13%.