TREASURIES-Yields rebound after hitting two-month lows in wake of weak jobs report

 (Recasts, updates yields)
    By Karen Pierog
    CHICAGO, May 7 (Reuters) - U.S. Treasury yields rebounded
after hitting two-month lows on Friday following data that
showed a much smaller-than-expected jobs gain in April, with
yields on longer-dated debt rising for the session as investors
remained confident the economy was on the road to a strong
    The benchmark 10-year yield, which dropped to
1.469%, the lowest since March 4, was last up 1.6 basis points
on the day at 1.5771%, holding below a 14-month high of 1.776%
reached on March 30. 
    The 30-year yield tumbled to its lowest level
since March 1 at 2.158%. It was last 4.4 basis points higher at
    Nonfarm payrolls increased by only 266,000 jobs last month
after rising by 770,000 in March, the Labor Department reported.
  Economists polled by Reuters had forecast payrolls advancing
by 978,000 jobs. The unexpected slowdown in job growth was
likely due to shortages of workers and raw materials as the
economy recovers from the coronavirus pandemic. 
    The yield drop was a "knee-jerk reaction" that faded as the
session wore on and the market digested the data, according to
    "Despite a huge miss, which it was, it's still employment
going in the right direction," said Andrew Richman, senior fixed
income strategist at Sterling Capital Management. 
    John Canavan, lead analyst at Oxford Economics, said the
report reinforced the idea the Federal Reserve can stick with
its current monetary policy for longer, which led to
intermediate yields outperforming longer-dated yields,
steepening the yield curve between five-year notes and 30-year
bonds. It was last 6.87 basis points steeper at
150.60 basis points.  
    "As market participants pile into curve-steepening trades,
part of that results in selling of the long end," Canavan said.
    The most closely watched part of the yield curve that
measures the gap between yields on two- and 10-year Treasury
notes was about 2 basis points steeper at 143.20
basis points.
    U.S. interest rate futures indicated that traders pushed out
expectations of a Fed rate hike by roughly three months after
the payrolls report's release.
    Eurodollar futures, which are a proxy for interest rate
expectations, showed a 90% chance of an interest rate hike in
March 2023, and fully priced in a hike in June 2023.
    Prior to the report, investors were betting there was a 90%
chance of a hike in December 2022, and a 100% chance in March
    Inflation expectations temporarily eased in the wake of the
jobs data, with the breakeven rate on five-year U.S. Treasury
Inflation-Protected Securities (TIPS) falling as
low as 2.586% from 2.661% at the previous close. It was last at
2.678%, down from a 10-year high of 2.696% reached on Wednesday.
    The 10-year TIPS breakeven rate also rebounded
after falling to 2.411%. It rose to 2.503%, the highest since
April 2013, indicating the market sees inflation averaging 2.5%
a year for the next decade.
    "The Fed's being extremely easy here still. We have stimulus
coming on. It's inflationary in the short run," Richman said.
    The two-year Treasury yield, which typically
moves in step with interest rate expectations, was last 1 basis
point lower at 0.1468%. 
    Next week will bring a burst of supply, with the U.S.
Treasury auctioning $58 billion of three-year notes on Tuesday,
$41 billion of 10-year notes on Wednesday, and $27 billion of
30-year bonds on Thursday. 
  May 7 Friday 4:23PM New York / 2023 GMT
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             0.015        0.0152    0.000
 Six-month bills               0.035        0.0355    -0.005
 Two-year note                 99-245/256   0.1468    -0.010
 Three-year note               100-64/256   0.2893    -0.022
 Five-year note                99-228/256   0.7725    -0.024
 Seven-year note               100-24/256   1.2359    -0.007
 10-year note                  95-236/256   1.5771    0.016
 20-year bond                  95-108/256   2.1607    0.034
 30-year bond                  91-72/256    2.28      0.044
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap        10.25        -0.50    
 U.S. 3-year dollar swap        13.00        -0.75    
 U.S. 5-year dollar swap         9.25        -0.50    
 U.S. 10-year dollar swap       -2.00        -0.50    
 U.S. 30-year dollar swap      -28.50        -1.50    
 spread (By Karen Pierog; additional reporting by Ann Saphir and Kate
Editing by Sonya Hepinstall)