TREASURIES-U.S. yields climb after jobs report

By Chuck Mikolajczak

NEW YORK, Oct 7 (Reuters) - The yield on the benchmark U.S. 10-year Treasury note rose on Friday, after a solid report on the labor market was likely to keep the Federal Reserve on its path of aggressive interest rate hikes to combat inflation.

Nonfarm payrolls increased by 263,000 jobs last month, the Labor Department said in its closely watched employment report on Friday, above the 250,000 estimate of economists polled by Reuters. The unemployment rate fell to 3.5% from the 3.7% in the prior month.

Expectations the Fed will raise interest rates by 75 basis points (bps) rose following the data as fed funds futures implied a 90% chance the policy rate will be increased to a 3.75% to 4% range at its November meeting, up from the 85% before the data.

"The market doesn’t want a healthy labor market right now, but this actually showed pretty much across the board some job gains," said Shawn Cruz, Head Trading Strategist at TD Ameritrade in Chicago.

"It’s not what the market wants to see and for the Fed, it is definitely not going to give the Fed any reason to think they need to pause or pivot or whatever anybody was looking for to make them shift away from their hawkish intentions."

The yield on 10-year Treasury notes was up 7.8 basis points to 3.902%.

Treasury yields have been sensitive this week to any signs the labor market might be slowing in hopes it would give the U.S. Federal Reserve room to pivot to a less hawkish policy stance and slow its rate of interest rate hikes after three straight increases of 75 basis points.

The yield on the 30-year Treasury bond was

up 6.6 basis points

to

3.859

%.

But Fed officials have been consistent in recent comments that the central bank will take aggressive measures in hiking interest rates to combat rising inflation, raising concerns among investors it could tilt the economy into a recession.

A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as a reliable indicator of a recession when inverted, was at a negative 41.6 basis points, up from the negative 57.85 hit on September 22.

The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was up 6.4 basis points at 4.314%.

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.382%, after closing at 2.352% on Thursday.

The 10-year TIPS breakeven rate was last at 2.238%, indicating the market sees inflation averaging 2.2% a year for the next decade. (Reporting by Chuck Mikolajczak Editing by Nick Zieminski)