TREASURIES-US yields slip as weak private sector jobs back Fed rate cut next week

*

Market to continue to focus on labor market weakness

*

US services sector index flat; jobs index still in contraction

*

US 2/10 yield curve little changed, but still in steepening bias

(Adds analyst comment, US services sector data, bullets, updates yields)

By Gertrude Chavez-Dreyfuss

NEW YORK, Dec 3 (Reuters) - U.S. Treasury yields fell on Wednesday after data showed a surprise decrease in private-sector payrolls in November, adding to worries about labor market weakness and cementing expectations of a rate cut by the Federal Reserve next week. In late morning trading, the benchmark 10-year yield dipped 1.3 basis points (bps) to 4.075%, while the 30-year yield was flat at 4.744%. On the front end of the curve, the two-year yield, which reflects interest rate moves by the Fed, was down 1.6 bps at 3.499%. Data showed that U.S. private employment decreased by 32,000 jobs last month after an upwardly revised 47,000 increase in October. Economists polled by Reuters had forecast private employment rising by 10,000 jobs after a previously reported 42,000 rebound in October.

Following the data, U.S. rate futures have priced in an 89% chance of a 25-bp cut next week, up from 83.4% a week ago, CME FedWatch showed.

"The labor market is going to be the driver of Fed policy right now because if we're looking at what the risks are, the risk of inflation accelerating from here seems pretty low to us and most economists, and for the Fed, the risk of the labor market deteriorating more than expected is going to be the focus," said Collin Martin, head of fixed income research and strategy at the Schwab Center for Financial Research in New York.

"So when we get any sort of negative reading on the labor market, like we got...with the ADP report, expectations about the path of Fed policy are going to shift. If it seems like the labor market is going to pivot from just gradually cooling to actually deteriorating sharply, that would imply a greater number of cuts over the next 12 months or so."

Separately, the U.S. services sector activity held steady in November, with employment still subdued and prices for inputs elevated, a survey showed on Wednesday. The report added to expectations of Fed easing next week.

The Institute for Supply Management said its nonmanufacturing purchasing managers index was little changed at

52.6

last month from 52.4 in October. Economists polled by Reuters had forecast the services PMI slipping to 52.1.

In other parts of the bond market, the yield curve, which reflects monetary policy expectations, was last little changed, with the spread between U.S. two-year and 10-year yields at 57.5 bps, from 57.4 bps on Tuesday. The curve steepened to as high 58.3 bps earlier in the session, and hit 59 bps on Tuesday, the widest spread since September.

The curve exhibited a moderate bull-steepening pattern, a scenario in which shorter-dated yields are falling faster than those on long maturities. It's mostly a reflection of market expectations that the Fed will cut interest rates imminently. (Reporting by Gertrude Chavez-Dreyfuss; Editing by Tomasz Janowski, Chizu Nomiyama and Deepa Babington)