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U.S. two-year yields drop to three-week lows

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U.S. 10-year yields fall to two-week lows

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U.S. jobs rise to 175,000 in April, lower than forecast

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U.S. rate futures price in two cuts of 25 bps this year

(Adds new comment, bullets, byline, U.S. rate futures, yield

curve; updates prices with weekly milestones)

By Gertrude Chavez-Dreyfuss

NEW YORK, May 3 (Reuters) - U.S. Treasury yields tumbled

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

largest economy created fewer jobs than expected last month,

reinforcing expectations that the Federal Reserve will start

cutting interest rates this year.

The benchmark U.S. 10-year yield fell to a two-week low of

4.453% after the data, and was last down 6.9 basis points (bps)

at 4.45%. On the week, the yield was down 16.7 bps,

on track for the biggest weekly fall since roughly mid-December.

The two-year yield, which reflects interest rate move

expectations, slid to three-week troughs of 4.716%,

and it was last at 4.793%, down 8.4 bps. With a weekly drop of

20.5 bps, the two-year yield was on pace for its largest decline

since around early January.

Data showed that U.S. nonfarm payrolls rose by 175,000 jobs

in April. The jobs number for March was revised higher to show

payrolls rising by 315,000 jobs instead of 303,000 as previously

reported. Economists polled by Reuters had forecast payrolls

advancing by 243,000.

Following the jobs report, U.S. rate futures priced in two

cuts of 25 basis points (bps) for 2024, most likely starting in

September or November, according to LSEG's rate probability app.

For the last few weeks, the futures market had factored in just

one cut on the back of still-elevated inflation.

"With the data being softer than expected, markets did

dovishly reprice expectations for the Fed policy outlook," wrote

Michael Brown, senior research strategist, at Pepperstone, in a

note after the data.

"However, a significant portion of this repricing likely

owed to the overly-hawkish nature of pricing prior to the

payrolls number, resulting in positions being unwound as the

data dropped," he added.

In other maturities, the U.S. five-year yield sank to a

three-week low of 4.41% and was last at 4.481%, down

8.5 bps.

On the long end of the curve, U.S. 30-year bond yields

sagged to a more than one-week trough of 4.633% and

were last down 4.9 bps at 4.669%.

The U.S. yield curve, meanwhile, modestly steepened or

narrowed its inversion. The spread between U.S. two- and 10-year

yields tightened to minus 26.5 bps, after the

jobs number, from minus 29.6 bps late on Thursday. It was last

at minus 28.9 bps.

This curves is effectively a "bull steepener," a

scenario in which short-term interest rates are falling faster

than the long-dated ones. This suggests that the Fed's next move

is a rate cut.