TREASURIES-US 10-year yields retreat from three-month peak

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U.S. jobless claim fall in latest week

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U.S. business activity rises in October

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U.S. five-year TIPS auction shows lackluster demand

(Adds new comment, PMI data, results of U.S. 5-year TIPS auction, bullets, updates prices)

By Karen Brettell

NEW YORK, Oct 24 (Reuters) -

Benchmark U.S. 10-year Treasury yields fell from a three-month high on Thursday after reaching levels that drew buying interest, though the market is expected to remain under pressure ahead of next week's jobs report for October and the November U.S. elections.

A much stronger than expected jobs report for September has sent yields higher as investors repriced for a less dovish Federal Reserve.

"The fundamentals of the U.S. economy have picked up," said Michael Lorizio, head of U.S. rates trading at Manulife Investment Management in Boston. The September jobs report "caught us all off guard ... That caused less risk-taking from market participants and the result of that is higher yields."

Next week's jobs report for October is expected to show that employers added 140,000 jobs during the month.

Data on Thursday showed that the number of Americans filing new applications for unemployment aid unexpectedly fell last week, but more people were collecting benefits in mid-October, which raises the risk of a rise in the jobless rate this month.

A separate report showed U.S. business activity increased in October amid strong demand, while firms raised prices for goods and services at the slowest pace in nearly 4-1/2 years. S&P Global's flash U.S. Composite PMI Output Index, which tracks the manufacturing and services sectors, rose to 54.3 this month from a final reading of 54.0 in September.

Treasury yields briefly trimmed their losses after the report.

Traders are now pricing in a 93.6% chance of a 25 basis-point (bp) cut at the Fed's November meeting and a 6.4% chance of a pause, according to the CME Group's FedWatch Tool. For 2024, the rate futures market has priced in 44 bps in easing.

Benchmark 10-year note yields were last down 4.2 bps at 4.199% after reaching 4.26% on Wednesday, the highest since July 26.

U.S. two-year yields, which track rate move expectations, fell 1.6 bps to 4.07%.

The yield curve between two-year and 10-year yields flattened on the day to 12.8 bps.

Investors overall have been cautious to buy bonds ahead of the Nov. 5 U.S. elections.

Betting markets including Polymarket show that Donald Trump is more likely to win the presidency, and Republicans may also take a majority in the Senate and House of Representatives.

"The market appears to be operating increasingly under the assumption that we may see a GOP sweep," said Vail Hartman, U.S. rates strategist at BMO Capital Markets.

The U.S. budget deficit is expected to worsen under a presidency of either Trump or Vice President Kamala Harris and an increase in government spending would likely lead to more Treasury issuance.

Trump's policies on tariffs and illegal immigration are also expected to increase inflation.

Also on Thursday, the Treasury Department sold $24 billion in five-year Treasury Inflation-Protected Securities (TIPS) to soft demand. Investors demanded a premium to take down the TIPS note, with a high yield of 1.67%, higher than the expected rate at the bid deadline of around 1.64%.

U.S. five-year TIPS yield came off their lows after the auction and was last flat at 1.811%.

(Reporting by Karen Brettell, Additional reporting by Gertrude Chavez-Dreyfuss; Editing by Nick Zieminski)