TREASURIES-US bonds tumble after blockbuster jobs number backs Fed pause stance

* Unemployment rate dips; report shows downward revisions

* Jobs report not as strong as it looks -analyst

* Fed rate cut chances reduced for 2026 post-jobs data (Adds new comment, updates yields)

By Gertrude Chavez-Dreyfuss

NEW YORK, April 3 (Reuters) - U.S. Treasuries dropped on Friday after data showed the world's largest economy created the most jobs in 15 months in March, cementing expectations that the Federal Reserve will hold interest rates steady for longer and not cut them.

Volume was thin, with the bond market trading for half a day in observance of Good Friday.

In midday trading, the benchmark 10-year yield, which rises when Treasury prices fall, advanced 3.1 basis points to 4.344% . For the week though, 10-year yields have fallen 10 bps, their largest weekly drop since February 23.

Investors bought Treasuries earlier this week, which pushed their yields lower, as the market grew hopeful about possible de-escalation of the conflict in the Middle East based on President Donald Trump's previous remarks. The U.S. president had said that he was willing to halt the military campaign against Iran despite a mostly closed Strait of Hormuz - a key waterway through which roughly 20% of global oil supplies pass.

But de-escalation has not happened. Trump threatened to extend attacks on civilian infrastructure in Iran after a U.S. strike cut a major highway bridge on Thursday, prompting a defiant response from Iran, which hit a water plant in Kuwait and said more would follow.

The two-year yield, which reflects interest-rate expectations, climbed 5.2 bps to 3.85%. This week, U.S. two-year yields have declined by 7.2 bps, their biggest weekly fall since late February.

Data showed U.S. job growth rebounded more than expected last month with 178,000 jobs after a downwardly revised 133,000 drop in February, boosted by the end of a healthcare workers' strike and warm temperatures.

The unemployment rate also inched lower to 4.3%, from 4.4%, but analysts said that was courtesy of a move lower in the labor force participation rate, to 61.9% from 62.0% in February.

Economists polled by Reuters had forecast payrolls rising by 60,000 jobs after a previously reported 92,000 decline in February.

However, analysts said the report was weaker than the headline number suggested.

"Revisions took some of the thunder out of the headline number and wage growth is slowing, indicative of perhaps some slack in labor markets," said Mark Luschini, chief investment strategist at Janney Montgomery Scott in Pittsburgh.

In other maturities, U.S. 30-year yields were up 2 bps at 4.91%. This week, however, 30-year yields slid 7.2 bps, marking their biggest weekly drop since the week of February 23.

Following the payrolls number, U.S. rate futures on Friday have priced out rate cuts this year, compared with 7 bps of easing late on Thursday and 55 bps before the Middle East conflict, according to LSEG estimates.

"For the time being, we can put the narrative to bed about the labor market going into retrograde," said Steve Sosnick, chief strategist at Interactive Brokers in New Canaan, Connecticut. "If you're hoping for cuts, this report does nothing to improve your hopes."

Zachary Griffiths, head of investment-grade credit at CreditSights in Charlotte, North Carolina, pointed out that the threshold for any policy move is very high right now.

"We got this headline payrolls beat of more than 170,000, which is certainly well above what the Fed has been talking about in terms of the break-even rate on the unemployment level." (Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by Colin Barr; Editing by Tomasz Janowski, Arun Koyyur and Andrea Ricci)