TREASURIES-Hot jobs data fuels Fed rate hike bets, lifts yields

(Updated in New York morning time)

* May jobs report shows 172,000 jobs added, double expectations, jobless rate steady at 4.3%

* Analysts say strong labor data increases likelihood of Fed rate hike by December

* 2-year Treasury yield hits 15-month high, yield curve flattens to narrowest since March

By Karen Brettell

NEW YORK, June 5 (Reuters) - U.S. Treasury yields surged on Friday, with two-year yields hitting a 15-month high, after data showed employers added far more jobs than expected in May, bolstering bets that the Federal Reserve will raise interest rates later this year. Employers added 172,000 jobs during the month, far above the expected 85,000 in jobs gains. The jobless rate remained at 4.3% for a third straight month.

"If there was any concern about the labor market, I think it really has evaporated," said Will Compernolle, macro strategist at FHN Financial.

Worries about a softening labor market had been seen as a brake on Fed tightening, even as inflation continues to run above the central bank's 2% annual target. Three straight months of solid job gains may now shift that calculus.

"The case for policy tightening independent of war risk has become very relevant," Compernolle said.

Elevated oil prices, driven by supply disruptions from the war with Iran, have heightened fears that inflation could become entrenched in core consumer prices - the measure the Fed watches most closely when setting policy.

The Fed is expected to keep rates steady when it meets later this month - the first meeting under Fed Chair Kevin Warsh.

Fed funds futures traders are now pricing in 64% odds of a hike by December.

The 2-year note yield, which typically moves in step with Federal Reserve interest rate expectations, reached 4.153%, the highest since February 2025, and was last up 8.4 basis points at 4.133%.

The yield on benchmark U.S. 10-year notes rose 5.3 basis points to 4.53%.

The yield curve between two- and 10-year notes reached 38.5 basis points, the flattest since March 19. (Reporting by Karen Brettell; Editing by Toby Chopra and Andrea Ricci )