TREASURIES-US yields rise after jobs data tops expectations

(Updates to New York afternoon trade )

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Labor market report exceeds expectations, dampening Fed rate cut hopes

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Unemployment rate drops to 4.3%, nonfarm payrolls rise by 130,000

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2-yr yield poised for biggest daily gain since October

By Chuck Mikolajczak

NEW YORK, Feb 11 (Reuters) - U.S. Treasury yields climbed on Wednesday, after a report on the labor market easily topped estimates and dented expectations the Federal Reserve could have leeway ?for a rate cut in the near-term. The Labor Department said nonfarm ?payrolls increased by 130,000 jobs in January after a downwardly revised 48,000 rise in December, topping the estimate of economists polled by Reuters that called for a 70,000 increase.

In addition, ?the unemployment rate fell to 4.3% last month from 4.4% in December.

"It was definitely a surprise this morning to see ?the numbers be this strong, including not only the number of jobs added, but the unemployment rate ?declining and the average hourly earnings ?increasing, so it's just kind of like a good report all the way around," said JoAnne Bianco, partner and senior investment strategist at BondBloxx Investment Management in Chicago.

"There were ?a lot of things that were causing the market to be ?less optimistic coming into the nonfarm payroll numbers today." Market expectations that the Federal Reserve could have room to reduce rates in the near-term had been creeping higher this week, after a soft retail sales report signaled ?consumers were dialing back spending, and White House economic adviser Kevin Hassett ?on Monday tempered ?expectations on job gains in the coming months, citing slower labor force growth and higher productivity.

The yield on the benchmark U.S. 10-year Treasury note rose 2.7 basis points to 4.1172% after hitting a session high of 4.206%.

After a solid ?auction of $58 billion in three-year notes on Tuesday, a $42 billion auction of 10-year notes was seen as soft by analysts, ?with demand of 2.39 times the notes on sale below the refunding average of 2.46, according to BMO Capital Markets.

More supply will come to the market on Thursday when the Treasury will auction $25 billion in 30-year bonds.

The yield on the 30-year bond advanced 2.2 basis points to 4.81% after reaching 4.834%. Market expectations for a Fed cut of at least 25 basis points at the central bank's March ?meeting had ?risen to about 20% before the jobs data, but retreated after the jobs report and were ?last at about 8%, according to CME's FedWatch Tool.

Expectations for a cut at the June meeting, the first meeting pricing in more ?than a 50% chance for a reduction of at least 25 basis points, fell to 59.8% from 75.2% on Tuesday.

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 65.8 basis points. Kansas City Fed president Jeff Schmid said the unexpectedly strong job growth in January should undercut concerns about cyclical weakness in the job market but that it was too early to assume rising productivity will be a remedy for still-elevated inflation.

The two-year U.S. Treasury yield, ?which typically moves in step with interest rate expectations for the Fed, jumped 5.8 basis points, on track for its biggest daily jump since October 29, to 3.512%.

The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.501% after closing at 2.491% on February ?10.

The 10-year TIPS breakeven rate was last at 2.328%, indicating ?the market sees inflation averaging about 2.3% a year for the next decade.

(Reporting by Chuck ?Mikolajczak Editing by Nick Zieminski and Chizu Nomiyama )