By David Randall
       NEW YORK, Jan 5 (Reuters) - U.S. Treasury yields
reversed course and tumbled Friday after a strong jobs report
and an unexpectedly weak reading of the services sector gave
clashing views of the strength of the U.S. economy.
    Yields, which move in the opposite direction of prices,
popped to three-week highs early in the trading session
following a better-than-expected nonfarm payrolls report. Yet
yields nosedived, taking the 10-year Treasury back below 4%,
after the Institute for Supply Management (ISM) said service
sector employment plunged to 43.3 last month, the lowest level
since July 2020. The index was at 50.7 in November.
    Jobs have become a focus for markets as investors look to
anticipate the timing of the first interest rate cut by the
Federal Reserve. Persistent strength in the labor market
threatens to accelerate inflation, forcing the Fed to maintain
or raise rates after its most aggressive rate-hiking cycle since
the early 1980s.  
    "I don't know how to classify this (ISM) report other than
to say it was absolutely dismal," said Jeff Klingelhofer,
co-head of investments for Thornburg Investment Management. "One
data print is one data print but currently you have two very
different reads into the employment side of the consumer
equation." 
    Futures markets whipsawed following the ISM report. Markets
are now pricing in a 24% chance that the Fed keeps benchmark
rates at their current range of 5.25% to 5.5% at its March
meeting, down from a 44% chance seen shortly after the nonfarm
payrolls report, according to CME's FedWatch Tool. Markets are
pricing in a 71% chance of a 25 basis point rate cut, up from a
53% chance seen earlier in the day.
    Overall, markets see the Fed cutting rates by a total of 143
basis points by the end of the year, down from expectations of
more than 160 basis points in cuts two weeks ago. 
    Despite Friday's volatility, "markets are starting a new
year and comparing their expectations with the Fed and with the
data and saying there's a disconnect here," said Chris Gunster,
head of fixed income at  Fidelis Capital. "Now you're starting
to see yields back up and we think we're going to see more of
that as the year moves on."
    The yield on 10-year Treasury notes was down 2.3
basis points at 3.968%. It is up approximately 20 basis points
from its level at the end of December. 
    The yield on the 30-year Treasury bond was
unchanged at 4.135%. 
    The two-year U.S. Treasury yield, which typically
moves in step with interest rate expectations, was down 5.1
basis points at 4.331%. 
    
    
      January 5 Friday 10:54AM New York / 1554 GMT
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             5.2275       5.3826    -0.012
 Six-month bills               5.0325       5.2477    -0.026
 Two-year note                 99-217/256   4.3307    -0.051
 Three-year note               100-190/256  4.103     -0.046
 Five-year note                99-42/256    3.9364    -0.037
 Seven-year note               98-184/256   3.9618    -0.034
 10-year note                  104-72/256   3.9701    -0.021
 20-year bond                  106-20/256   4.2916    -0.003
 30-year bond                  110-124/256  4.135     0.000
 
 (Reporting by David Randall; Editing by Susan Fenton, Barbara
Lewis and Jonathan Oatis)