* Two-year yield above 0.50 percent, 1st time since June 2011
* U.S. services sector growth strongest in almost 8 years-ISM
* ADP jobs data raise doubts over a robust payrolls report
* Fed buys $3.36 billion medium-term Treasuries
By Richard Leong
NEW YORK, Sept 5 (Reuters) - Benchmark U.S. yields jumped to near the 3 percent level on Thursday, as a stunningly strong report on the U.S. services sector stoked a flood of selling in a global bond market rout and reinforced the view that the Federal Reserve might announce a reduction in its bond-purchase stimulus in two weeks.
The report from the Institute for Supply Management, which showed services industries in August posted their fastest growth since December 2005, lifted benchmark yields for a fourth straight session to 25-month highs.
“You are seeing a normalization in the economy so you should see a normalization in rates,” said Craig Elder, fixed income strategist at Baird Private Wealth Management in Milwaukee.
Elder and other analysts expected the 10-year yield to pierce above 3 percent if Friday’s payrolls report were to show a decent pace of job growth and support the case for policy-makers to scale back the Fed’s $85 billion monthly purchases of Treasuries and mortgage-backed securities.
However, a disappointing payroll figure and/or safehaven bids linked to possible U.S.-led military action against Syria could easily push the 10-year yield to 2.75 percent, they said.
The ISM services report came after yields retreated in reaction to a private-sector report that raised doubts about the strength in domestic job growth in Friday’s payrolls data.
Traders had braced for a possibly stronger-than-forecast private-sector hiring figure of 200,000 from payroll processor ADP, which would have raised expectations of a robust reading in the government’s payrolls report to be released at 8:30 a.m. EDT (1230 GMT) on Friday.
Such a level of private job growth was perceived as a slam-dunk for the U.S. central bank to dial back its third round of quantitative easing, or QE3, in a bid to support the economy.
However, the U.S. companies that ADP tracks added 176,000 workers in August, slightly below the consensus view of 180,000 and a revised 198,000 increase in July.
“This number is not a definitive number for the Fed to taper. This makes some people worry about tomorrow’s payrolls number, but I still think it will be a decent one,” said Robbert van Batenburg, director of market strategy at Newedge USA LLC in New York.
Economists polled by Reuters forecast U.S. employers added 180,000 jobs in August, leaving the unemployment rate unchanged from July at 7.4 percent, the lowest since December 2008.
Benchmark 10-year Treasury notes last traded down 21/32 in price, yielding 2.975 percent, up 7.8 basis points from late on Wednesday. The 10-year yield rose to a session high of 2.986 percent, a level not seen since July 2011.
Short- and medium-term maturities were hit hard again on fears the Fed might raise short-term rates not too long after it stops buying Treasuries and mortgage-backed securities.
The two-year note yield traded above 0.50 percent for the first time since June 2011. It last traded at 0.514 percent, up 4.4 basis points from late on Wednesday.
Trading volume was heavy with $298 billion of Treasuries changing hands as of noon, 58 percent above its 20-day average, according to data from ICAP, the world’s largest broker of U.S. government debt.
Investors also dumped foreign bonds, sending German and British 10-year government debt yields to their highest levels in 1-1/2-years and since July 2011, respectively .
Traders received other snapshots on U.S. labor conditions on Thursday. The Labor Department said Americans filing for unemployment benefits fell to 323,000 last week, matching the level in the week of Aug. 11, which was the lowest reading since January 2008.
On the other hand, planned layoffs rose in August to 50,462, which was their highest level since February, Challenger, Gray & Christmas said.
On the supply front, the Fed bought $3.357 billion in Treasuries due November 2020 to August 2023, which was part of its planned $45 billion in government debt purchases in September.
The Treasury Department as expected pared its three-year debt offering for next week by $1 billion to $31 billion, which was the smallest amount since January 2009 when it reintroduced this maturity.
Meanwhile, it Treasury will reopen prior 10-year and 30-year issues at $21 billion and $13 billion, respectively . The auction sizes matched the previous reopenings for these longer maturities in July.