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Weak jobs data leads to four-month low in 2-year, 10-year

yields

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ADP report shows private payrolls rose less than expected

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Fed funds futures show 98% odds of September rate cut

(Adds new comments, US nonfarm payrolls outlook, yield curve)

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 mounting evidence of a

weakening labor market that affirmed expectations the Federal

Reserve will resume cutting interest rates at its policy meeting

later this month.

U.S. yields, however, came off their lows in the afternoon

session as market participants positioned ahead of Friday's

nonfarm payrolls report.

A Reuters poll showed a forecast of 75,000 new jobs created

last month, compared with 73,000 in July. The unemployment rate

was seen to have ticked up to 4.3% from 4.2% in July.

"It's going to come down to nonfarm payrolls and what it

means for the Fed," said Zachary Griffiths, head of investment

grade and macro strategy at CreditSights in Charlotte, North

Carolina.

"We've shifted our call fairly dramatically to call for

a 50 basis-point cut in September as the labor market has

weakened a lot...and we are looking for more weakness out of the

report on Friday. And if you think about the Fed's reaction

function a year ago, they went 50 (bp cut) then, and the labor

market looks quite a bit more fragile now based on the latest

data."

In afternoon trading, U.S. two-year yields, which are

tied to monetary policy, slipped 2.4 basis points (bps) to

3.589%. It slid to a four-month low of 3.588% earlier

in the session.

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

early May of 4.167%. The yield was last down 4.4

bps at 4.167%.

U.S. 30-year yields also retreated, down 3 bps at 4.862%

. On Wednesday, it topped 5% amid a global bond

selloff caused by fiscal worries. The 5% yield was the highest

in about 1-1/2 months.

Treasury yields fell overall after 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.

"We continue to see softness growing in the labor market as

tariff policy uncertainty lingers, immigration changes take

effect, and AI adoption grows," wrote Eric Teal, chief

investment officer at Comerica Wealth Management in emailed

comments.

"The silver lining is the weaker the jobs data, the more

cover there is for stimulative interest rate cuts that are on

the horizon. The boost in the latter half of this year should

come from easier monetary policy and stimulative fiscal policies

to avoid further economic deterioration."

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

98% probability that the 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 61 bps of easing this

year, up from 56 bps earlier this week.

The Treasury yield curve, meanwhile, flattened for a second

straight day, with the gap between two-year and 10-year yields

narrowing to 58 bps, compared with 59.6 bps late

on Wednesday. Earlier on Wednesday, the curve hit 63.8 bps, its

widest spread since April.

The curve continued to show a bull-flattening trend,

referring to a scenario in which long-term interest rates are

falling faster than those on the short end of the curve. That,

for now, reflects a slight decline in inflation expectations

with the softening labor market and often precedes the Fed

cutting interest rates.