TREASURIES-10-year yields turn higher as size of Fed rate cut in question

(Updated at 1005 EDT)

By Karen Brettell

NEW YORK, Sept 6 (Reuters) - Benchmark 10-year Treasury yields turned higher on Friday after earlier reaching a 15-month low, as August's payrolls report failed to offer a clear signal on the size of an expected Federal Reserve interest rate cut later this month.

Nonfarm payrolls increased by 142,000 jobs last month after a downwardly revised 89,000 rise in July. Economists polled by Reuters had forecast payrolls increasing by 160,000 jobs.

The unemployment rate fell to 4.2%, from 4.3% the prior month.

"I think the market's really struggling with this one because it's really in the middle of what could be used as a justification for either a 25 or 50 basis point rate cut," said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities in New York.

U.S. 10-year Treasury yields were last up 0.9 basis point at 3.742% and earlier fell as low as 3.657%, the lowest since June 2023.

Interest rate-sensitive two-year yields fell 1.5 basis points to 3.737% and reached 3.642%, the lowest since March 2023.

The closely watched yield curve between two- and 10-year notes was at 0.1 basis point and reached 3.4 basis points, the steepest since July 2022.

The bond market is pricing in an aggressive path of rate cuts over the coming year and a half, even as many economists see the U.S. avoiding a recession.

Fed funds futures traders are now pricing a 61% chance of a 25 basis point cut at the Fed's Sept. 17-18 meeting, and a 39% chance of a 50 basis point reduction, according to the CME Group's FedWatch Tool.

In total 240 basis points of cuts are priced in by the end of 2025.

""The payroll report suggests there is no reason for the Federal Reserve to rush," said Drew Matus, chief market strategist at MetLife Investment Management in New Jersey. "The labor market is slowing, but at a slow pace, allowing the Fed to move more deliberately in September."

Some of the underlying details of Friday's report, including downward revisions of 86,000 jobs gains for the past two months, however, may be a warning that the labor market is not as healthy as hoped.

"We do see the labor market really not just coming into balance, but really starting to cool off quite significantly, which could make the Fed quite nervous," said TD's Goldberg.

New York Fed President John Williams said Friday that a better balanced economy has opened the door to cutting rates, with the full course of action to be determined by how the economy performs. (Reporting By Karen Brettell; Additional reporting by Sin?ad Carew; Editing by Christina Fincher, Alex Richardson and Jonathan Oatis)