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

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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 120 bps cut this year

(Adds new comments, updates milestones, prices)

By Gertrude Chavez-Dreyfuss

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

nosedive on Friday, after data showed the world's largest

economy created fewer jobs than expected in July while the

unemployment rate rose, supporting bets of aggressive interest

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 17.6 basis points (bps) at

3.801%. It was on track for its largest daily drop

since November 2023. On the week, it sank nearly 40 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 3.888%, down 27.7 bps, on pace for

the biggest daily fall since March last year.

On the week, two-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 a 73% chance

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

late on Thursday, according to LSEG calculations. The market has

also priced in about 120 bps of easing this year, from 75 bps on

Thursday.

"It's messy at the moment. And it's not just equity

markets...but this period will sort itself out," said Gregory

Faranello, head of U.S. rates, at AmeriVet Securities in New

York.

"For yields, it's often about the why. And if yields are

forced to come down more aggressively because of economic

conditions, that's not a great scenario for risk assets. For now

that's how markets are behaving. Ultimately, we don't want the

Fed to have to come down more than they'd like."

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 8.8 bps.

The curve has bull-steepened following the jobs report,

which means that short-dated rates fell 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. The expectation is that

the Fed's next move would be a rate cut.

A steeper curve shows longer-dated yields are higher than

those on shorter maturities, reflecting a normal upward slope.

This means investors are being compensated more for the risk of

holding longer-term securities.

"A month ago, the expectation was less than two rate cuts by

the end of the year and now the expectation is, statistically,

more than four...So I think that quick adjustment has given

people reason to think well maybe the Fed has waited too long

and that we're going to slow down more than we had thought,"

said Josh Wein, porfolio manager, at Hennessy Funds, in Chapel

Hill, North Carolina.

"I don't agree with that, but I think that's the

consensus, and that's what's driving things lower. The offset to

all of that is a 10-year that is lower by (more than) 30 basis

points in the last week. I would rather follow that than all of

the noise. I think the (stock) market is in great shape."

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 26.9 bps at 3.703%, while the five-year

yield fell 22.6 bps to 3.620%.

The U.S. seven-year yield declined to its lowest since June

last year and was last down 21 bps at 3.676%.

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%. On the week, the yield has fallen 44.5 bps,

the biggest weekly loss sine April 2000.

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

They last fell 13.9 bps to 4.13%.