TREASURIES-US yields skid after soft data, ahead of payrolls

*

U.S. jobless claims rise in latest week

*

U.S. job layoffs increase in March

*

Fed officials say U.S. central bank could take time to cut rates

*

U.S. yield curve deepens inversion

(Recasts; adds new comment, bullets, graphic; updates prices)

By Gertrude Chavez-Dreyfuss

NEW YORK, April 4 (Reuters) - U.S. Treasury yields fell on Thursday, a day after hitting multi-month highs, as labor market data showed moderation, which supported expectations the Federal Reserve could start easing some time this year.

The overall economic trajectory though remained tilted upwards, with some pockets of weakness, analysts said. Yet market participants are taking in stride Fed officials' comments on Thursday suggesting the U.S. central bank could take its time cutting interest rates given stickier inflation and generally strong economic growth.

"The economy is probably stronger than people would have expected and that means fewer rate cuts," said Brian Reynolds, chief market strategist at Reynolds Strategy in Massachusetts.

He believes the Fed would cut rates fewer than three times this year given that the S&P 500 index has hit all-time highs.

"The longer that stocks stay up here, the less likely that the Fed will ease," said Reynolds. "If they ease right now, you would see stocks go off to the races. Investors think the economy is doing a little better than expected and that buys the Fed more time."

Bond investors also balanced their positions ahead of Friday's nonfarm payrolls report for March, a major factor in gauging the timing of the Fed's first easing in 2024 and the number of rate cuts.

Economists estimate 200,000 new jobs were added in March, down slightly from the 275,000 in February.

"There's a little bit of fatigue on the move higher and not really willing to put on new positions ahead of payrolls tomorrow," said Zachary Griffiths, senior investment grade strategist at CreditSights in Charlotte, North Carolina.

Thursday's data also contributed to the downdraft in yields.

Initial claims for state unemployment benefits rose 9,000 to a seasonally adjusted 221,000 for the week ended March 30, data showed. Economists polled by Reuters had forecast 214,000 claims in the latest week.

At the same time, U.S. layoff announcements rose 7% in March to the highest since January 2023, led by technology and government-sector job eliminations, outplacement firm Challenger, Gray & Christmas said.

In afternoon trading, the benchmark 10-year yield was down 5.4 basis points (bps) at 4.301%.

U.S. 30-year yields slid 4.5 bps to 4.464%.

On the shorter end of the curve, the two-year yield was down 4.2 bps at 4.637%.

A chorus of Fed officials on Thursday took turns preparing the market for what seemed like a possible delay in rate cuts this year.

Richmond Fed President Thomas Barkin, a voting member of the Fed's policy-setting committee this year, said the U.S. central bank has

"time for the clouds to clear"

on inflation before starting to cut rates.

Cleveland Fed President Loretta Mester, another voter on the Federal Open Market Committee, said she believes 2024 growth will be above trend and does not think disinflation in 2024 will match that of last year. She does anticipate, however, the Fed will be able lower rates later this year.

Minneapolis Fed President Neel Kashkari said on Thursday that at last month's U.S. central bank meeting he penciled in

two rate cuts

this year but if inflation continues to stall, none may be required by year-end.

Following Thursday's data and Fed comments, the U.S. rate futures market has priced in a 71% chance of a rate cut in June, up from 62.3% late on Wednesday and 60.4% a week ago, the CME's FedWatch tool showed.

The market has also pared back expectations for rate cuts to fewer than three this year, from three to four a few weeks ago, according to LSEG's rate probability app.

The yield curve flattened, or deepened, its inversion from late on Wednesday. The spread between U.S. two- and 10-year notes was at minus 33.8 bps, compared with Wednesday's minus 32.7 bps.

This so-called bull flattener trend, in which long end rates fall more sharply than those on the front end, suggests lower inflation expectations, analysts said. This often precedes the start of the Fed's rate-cutting cycle.

(Reporting by Gertrude Chavez-Dreyfuss; Editing by Will Dunham and Richard Chang)