TREASURIES-US Treasury yields drop as traders see higher chance of Fed rate cut

(Updates to US afternoon trading)

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Unemployment rate rises to 4.4% despite job growth

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Traders see increased chance of December Fed rate cut

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Fed policymakers express concerns over further easing due to inflation

By Karen Brettell

NEW YORK, Nov 20 (Reuters) -

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.S. Treasury yields fell on Thursday after data showed the U.S. unemployment rate rose in September even as employers added more jobs than economists had expected during the month, with traders now seeing an increasing chance of a Federal Reserve rate cut in December. Nonfarm payrolls increased by 119,000 jobs in September. Economists polled by Reuters had forecast 50,000 jobs would be added. The unemployment rate rose to 4.4%, from 4.3% in August.

"It probably gives both the hawks and the doves something to confirm what they thought," said Jan Nevruzi, U.S. rates strategist at TD Securities in New York, about the jobs report.

RISING ODDS OF RATE CUT

Treasuries rallied, however, with yields falling, as traders brought the pricing of a December rate cut back closer to 50-50, he said.

Traders repriced for falling odds of a December rate cut in the past week as many Fed policymakers expressed concerns about further easing due to still elevated inflation.

Fed funds futures traders are now pricing in a 40% chance of a December rate cut, up from 30% on Wednesday, according to the CME Group's FedWatch Tool. Chicago Fed President Austan Goolsbee repeated on Thursday he is "uneasy" about frontloading interest-rate cuts. Cleveland Fed President Beth Hammack downplayed the impact of September hiring data as she again said U.S. monetary policy needs to be positioned to lower persistently high inflation.

Economists at Morgan Stanley said Thursday's data indicates that the summer slowdown in payrolls may have exaggerated weakening, adding that the bank no longer expects the Fed to cut rates next month.

The 2-year note yield, which typically moves in step with Fed rate expectations, was last down 4.2 basis points on the day at 3.556%. The yield on benchmark U.S. 10-year notes fell 2.7 basis points to 4.104%.

The two-year, 10-year Treasury yield curve steepened to 54.6 basis points.

The federal government is releasing delayed economic reports after reopening last week from a record 43-day shutdown. The data fog is adding to uncertainty over Fed policy. The U.S. Bureau of Labor Statistics said on Wednesday it will release a combined jobs report for October and November on December 16, after the Fed's December 9-10 policy meeting. The October data will lack the unemployment rate, however, as it was unable to collect the data during the shutdown. Minutes from the Fed's October meeting released on Wednesday show that a divided Fed cut interest rates last month even as policymakers cautioned that doing so could risk entrenched inflation and a loss of public trust in the U.S. central bank.

The Treasury saw soft demand for a $19 billion sale of 10-year Treasury Inflation-Protected Securities on Thursday. The debt sold at a high yield of 1.843%, around 1-1/2 basis points above where it traded before the auction.

Demand was above average at 2.41 times the amount of debt on offer, though dealers took a larger-than-normal share of 14.8% of the debt, Vail Hartman, U.S. rates strategist at BMO Capital Markets, said in a note.

(Reporting by Karen Brettell, editing by Deepa Babington, Chizu Nomiyama, Rod Nickel)