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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. services sector contracts in April

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

(Adds new comment, ISM services data, Fed's Bowman comments,

graphics; updates prices)

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 later 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 4.501%. 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

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

and it was last at 4.809%, down 6.7 bps. With a weekly drop of

19 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.

The unemployment rate remained below 4% for the 27th

straight month.

"I think the jobs data and jobless number tell us what they

have been telling us for quite some time. It's not so much the

headline number: It's really about the underlying details," said

Jeff Klingelhofer, co-head of investments at Thornburg

Investment Management in Santa Fe, New Mexico.

"When you look at temporary workers coming down, when you

look at full-time employment versus part-time employment, what

we see is that the economy is slowing and the mismatch between

labor supply and demand is getting back into relative

equilibrium," he added.

The jobs report was followed by data showing the U.S.

service sector contracted in April, while price pressures

jumped. The Institute for Supply Management (ISM) said its

non-manufacturing PMI fell to 49.4 last month from 51.4 in

March, the lowest since December 2022. A reading above 50

indicates growth in the services industry, which accounts for

more than two-thirds of the economy.

Services inflation has picked up, with the measure of prices

paid for inputs by businesses jumping to 59.2 from 53.4 in

March.

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.

Fed Governor Michelle Bowman said on Friday she expects

inflation to decline further with a steady policy rate, but she

still sees upside inflation risks that may affect her outlook.

Bowman also said she remains willing to raise the fed funds

rate at a future meeting if data showed inflation has stalled or

reversed.

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

three-week low of 4.41% and was last at 4.488%, down

7.8 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 5.2 bps at 4.665%.

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 curve 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.

"Treasury yields will remain within a broad trading range

for the next few months, capped by last October's cyclical peak

on the upside and the lows seen earlier this year (roughly 3.80%

on the 10-year) on the downside," wrote Ryan Swift, U..S bond

strategist, at BCA Research in Montreal.

"Ultimately, yields will break out to the downside of this

range, but we will need to see more weakness in the labor market

data before that occurs."