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Weak jobs data leads to four-month low in Treasury yields

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ADP report shows private payrolls rose less than expected

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Fed rate cut expected with 97% probability, futures

indicate

(Adds analyst comment, bullets, fed funds pricing, updates

yields)

By Gertrude Chavez-Dreyfuss

NEW YORK, Sept 4 (Reuters) - U.S. Treasury yields fell

on Thursday, with those on two-year and 10-year notes dropping

to four-month lows, after data showed a weakening labor market

that affirmed expectations the Federal Reserve will resume

cutting interest rates at its policy meeting later this month.

In mid-morning trading, U.S. two-year yields, which are tied

to monetary policy, slipped 1 basis point to 3.602%.

It slid to a four-month low of 3.59% earlier in the session

after the release of the jobless claims data.

The benchmark 10-year yield also slid to its lowest since

early May of 4.176%, following the U.S. private jobs

report. The yield was last down 3.1 bps at 4.181%.

The ADP National Employment Report showed that U.S. private

payrolls increased less than expected in August, rising by

54,000 jobs last month after a slightly upwardly revised 106,000

increase in July. Economists polled by Reuters had forecast

private employment increasing by 65,000.

At the same time, data showed U.S. initial jobless claims rose

8,000 to a seasonally adjusted 237,000 for the week ended August

30. Economists polled by Reuters had forecast 230,000 claims for

the latest week.

"The recent slowdown in hiring reflects the echoes of

uncertainty coming out of the tariff announcements in the

spring, combined with demographic changes and maturity of the

cycle," wrote Tom Simons, chief U.S. economist at Jefferies, in

a research note.

He maintained that the Fed will cut interest rates three

times starting at the next meeting in September, noting that

U.S. "data will turn stronger some time soon, which will limit

the extent of the Fed's rate cutting cycle."

Following the data, U.S. rate futures have priced in a 97%

chance that Fed will lower rates by 25 bps at the end of the

two-day policy meeting on September 17, according to the CME

Group's FedWatch tool.

Traders have also priced in about 60 bps of easing this

year, up from 56 bps earlier this week.