TREASURIES-US Treasury yields higher after weak 30-yr bond auction

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Labor market data shows rise in jobless claims, productivity exceeds estimates

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Bloomberg reports Waller favorite to replace Powell as Fed chair

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Bostic still sees only one cut this year

(Updates to afternoon trading)

By Chuck Mikolajczak

NEW YORK, Aug 7 (Reuters) - U.S. Treasury yields were modestly higher in a choppy session on Thursday following a soft auction of 30-year bonds, the latest in a string of sales that showed lackluster demand this week.

Yields had moved off their session highs earlier in the day after data on the labor market and worker productivity did little to change market expectations for rate cuts from the Federal Reserve this year.

A poor $25 billion auction in 30-year bonds pushed yields higher, however, with a bid-to-cover ratio of 2.27, the softest since November 2023.

The Labor Department said weekly initial jobless claims rose 7,000 to a seasonally adjusted 226,000, the highest level since the week ended July 5 and slightly above the 221,000 estimate of economists polled by Reuters.

In addition, worker productivity increased 2.4% in the second quarter, above the 2.0% estimate, stemming a jump in labor costs at the start of the year, as unit labor cost growth came in at 1.6% after an upwardly revised 6.9% in the first quarter.

Yields had been moving lower earlier in the week, including a steep drop on Friday, following a weak government payrolls report and an announcement from the Fed that Governor Adriana Kugler was resigning early, which bolstered market expectations for a rate cut from the central bank at its September meeting.

But the decline in yields began to stall on Tuesday beginning with a soft auction of $58 billion in three-year notes and continued with Wednesday's $42 billion 10-year auction, and culminated in the 30-year sale on Thursday.

"We're definitely in the camp of the jobs numbers have not been telling the real story for some time and now we're just getting that data confirmed with the revisions, so I'm not really super surprised that there's weakness in the auctions," said Jeff McClean, CEO of Solidarity Capital and Solidarity Wealth in Lehi, Utah.

The yield on the benchmark U.S. 10-year Treasury note was up 1.4 basis points to 4.246%, reaching a high of 4.254% after the auction.

Yields reversed off their session lows after Bloomberg News reported Governor Christopher Waller is emerging as a top candidate to serve as the central bank's chair among President Trump's team, citing people familiar with the matter.

"Everyone's got a comfort level with Waller now, his name's been floated long enough," said McClean.

The yield on the 30-year bond gained 1 basis point to 4.821%.

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 an indicator of economic expectations, was at a positive 51 basis points after hitting a fresh 2-1/2 week high of 55.1 on Wednesday.

The two-year U.S. Treasury yield, which typically moves in step with Fed interest rate expectations, advanced 3.3 basis points to 3.734% after hitting 3.736% on the session.

Atlanta Fed President Raphael Bostic on Thursday said risks to the labor market have increased, but he still thought a single 25 basis point cut was likely to be appropriate this year.

Market expectations for a September rate cut of at least 25 basis points from the Fed stood at 91.4%, down slightly from the 94.6% in the prior session and well above the 37.7% from a week ago, according to CME's FedWatch Tool.

(Reporting by Chuck Mikolajczak; Editing by Andrea Ricci and Diane Craft)