TREASURIES-Yields fall as ADP jobs gains miss expectations

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ADP shows smallest job gain since January 2021

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Traders price in 45% chance of 50 bps cut at September meeting

By Karen Brettell

NEW YORK, Sept 5 (Reuters) - U.S. Treasury yields fell and interest rate sensitive two-year yields reached a 15-month low on Thursday after ADP jobs data showed employers added fewer jobs than anticipated in August, before Friday's keenly awaited government jobs report.

Private payrolls increased by 99,000 jobs, the smallest gain since January 2021, after rising by a downwardly revised 111,000 in July, the ADP National Employment Report showed.

Economists polled by Reuters had forecast private employment would advance by 145,000 positions after a previously reported gain of 122,000.

The report was consistent with a still solid labor market, said Thomas Simons, senior U.S. economist at Jefferies in New York.

"When you look at slowing payroll growth, slowing job openings, slowing claims and steady wage growth, that means that the labor market has settled into a better balance that is a good place for most workers," Simons said.

"I don't think that we are seeing the early stages of some sort of unraveling or rapid deterioration in the labor market, and unless we do, I still think that the market is pricing in way too much easing from the Fed, whether that be in terms of pace or total number of cuts," he added.

Interest rate sensitive two-year note yields were last down 4.9 basis points at 3.721%, the lowest since May 2023. Benchmark 10-year note yields fell 3.7 basis points to 3.731%, the lowest since Aug. 4.

The yield curve between two- and 10-year yields was at 0.80 basis point, after turning positive on Wednesday for the first time since Aug. 5.

Yields have fallen as traders price in aggressive interest rate cuts by the Federal Reserve, even as many economists see the economy avoiding a recession.

Traders are pricing in a 45% probability of a 50 basis point cut a the Fed's Sept. 17-18 meeting, and 55% odds of a 25 basis point reduction, according to the CME Group's FedWatch Tool.

The U.S. central bank is also expected to cut rates at each meeting through at least June, with 242 basis points of cuts priced in by the end of 2025.

Other data on Thursday showed that the number of Americans filing new applications for jobless benefits declined last week as layoffs remained low.

Friday's jobs report is expected to show that employers added 160,000 jobs during August, up from 114,000 in July, according to the median estimate of economists' polled by Reuters. The unemployment rate is anticipated to ease to 4.2%, from 4.3%., (Reporting By Karen Brettell; editing by Barbara Lewis)