TREASURIES-Yields lower after strong payroll data puts focus on Fed

       By Ross Kerber
    July 2  (Reuters) - U.S. Treasury yields were lower on
Friday after a strong payroll report left uncertainty about how
the U.S. Federal Reserve might respond.
    The benchmark 10-year yield was down 2.4 basis
points at 1.4559% in morning trading. That was slightly above
its level before new Labor Department data showed U.S. job
growth accelerated in June.
    Nonfarm payrolls increased by 850,000 jobs last month after
rising 583,000 in May, the Labor Department said in its closely
watched employment report on Friday. The unemployment rate rose
to 5.9% from 5.8% in May.
    Treasury yields initially spiked up on the strong job gains,
then fell back. Market analysts said the trading reflected mixed
interpretations about how the Fed might incorporate the new
information as it decides how to end crisis-era bond-buying.
    Normally strong numbers would send yields higher, said Priya
Misra, global head of rates strategy for TD Securities in New
York. Of Friday's trading, she said, "I think the market is torn
between whether to price in the market outlook or the Fed
reaction."
    The minutes of the Fed's June 16-17 meeting, when officials
opened debate on how to end crisis-era bond-buying and signalled
interest rate increases were closer on the horizon than
previously thought, are due out on Wednesday.
    Friday's trading left little changed 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. It was at 121 basis
points, about a basis point higher than Thursday's close.
   The two-year U.S. Treasury yield, which typically
moves in step with interest rate expectations, was down 1.4
basis points at 0.2435%.

      July 2 Friday 9:31AM New York / 1331 GMT
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             0.0475       0.0482    0.000
 Six-month bills               0.0525       0.0532    0.002
 Two-year note                 99-196/256   0.2435    -0.014
 Three-year note               99-104/256   0.4533    -0.018
 Five-year note                99-250/256   0.8798    -0.022
 Seven-year note               100-54/256   1.2184    -0.027
 10-year note                  101-140/256  1.4559    -0.024
 20-year bond                  103-252/256  2.0057    -0.013
 30-year bond                  106-196/256  2.07      -0.016

   DOLLAR SWAP SPREADS
                               Last (bps)   Net
                                            Change
                                            (bps)
 U.S. 2-year dollar swap         7.50        -0.50
 spread
 U.S. 3-year dollar swap        11.50        -0.75
 spread
 U.S. 5-year dollar swap         7.75        -0.25
 spread
 U.S. 10-year dollar swap       -2.00         0.00
 spread
 U.S. 30-year dollar swap      -31.25        -0.25
 spread


 (Reporting by Ross Kerber in Boston
Editing by Chizu Nomiyama)

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