TREASURIES-US yields top 4% and 2s/10s invert on bets of less dovish Fed

(Updates as of 1030 EDT; Changes dateline)

By Alden Bentley

NEW YORK/LONDON, Oct 7 (Reuters) - The benchmark Treasury yield topped 4% for the first time in two months on Monday, and a widely watched section of the yield curve briefly inverted as markets bet against another jumbo U.S. rate cut after Friday's strong U.S. jobs report.

The 10-year yield rose 4.3 basis points from late Friday to 4.024%, and hit its highest level since July 31 at 4.0290% in early trade. It rose 13 bps on Friday, its biggest one-day rise since June 30, after news the U.S. economy added 254,000 jobs in September, above the expectations of economists polled by Reuters. The unemployment rate surprisingly fell to 4.1% from 4.2%.

The two-year yield, which is more sensitive to changes in monetary policy expectations, reached its highest since Aug. 19 at 4.0270% and was up 6.9 basis points at 4.0014%. It rose almost 22 bps on Friday, its biggest daily rise since April.

"The market very quickly flipped from talking about a 50 basis point cut to possibly no cut in November, just based on the strength of the data," said Gennadiy Goldberg, chief U.S. rates strategist at TD Securities in New York.

"It would be very strange for them to give up the ghost on additional cuts this soon after a 50-bp rate cut," he said.

Based on the fed funds futures term structure, traders see a roughly 85% chance of a 25 bps ease in the policy rate at next month's Federal Reserve meeting. That was lower than a more than 90% certainty priced in on Friday, largely because traders started betting that the Fed could leave rates unchanged, which had 15% probability on Monday, according to LSEG calculations.

The Fed last month lowered the fed funds target rate to 4.75%-5.0% from 5.25%-5.5%, where it had been since the Fed stopped hiking rates in July 2023.

"Friday's U.S. labor report put paid to U.S. recession fears and most remaining hopes that the Fed could follow up September's rate cut with another 50 bps move next month," said Jane Foley, senior FX strategist at Rabobank.

The closely watched spread between two- and 10-year U.S. Treasury yields briefly turned negative for the first time since Sept. 18, the day the Fed eased 50 bps. It was last at a positive 2.1 basis points, compared to Friday's late +4.1 bp.

Goldberg said the selloff in Treasuries that brought key yields just above 4% could incentivize investors to add duration, once the market stabilized. The auction of 3-year, 10-year and 30-year Treasury debt this week could see decent interest now that yields have backed up, he said.

The 30-year bond yield rose 2.8 basis points to 4.2964% from 4.268% late on Friday.

The main U.S. economic release of the week comes Thursday with the release of September's Consumer Price Index. Inflation worries have given way to the strength of the labor market as a driver of Fed policy thinking. (Reporting by Alden Bentley in New York, and Samuel Indyk and Harry Robertson in London, editing by Alun John, Dhara Ranasinghe and Barbara Lewis)