(New throughout; adds analyst quotes)
By Kate Duguid
NEW YORK, Oct 4 (Reuters) - The two-year Treasury yield’s dramatic multi-day fall was capped on Friday after U.S. job growth increased moderately in September, leaving the yield up 1.4 basis points on the day, though still down 22.5 basis points for the week.
The two-year yield is a proxy for investor expectations of moves in interest rate policy. Its move this week to its lowest level since September 2017 indicated a jump in forecasts that the Federal Reserve would cut rates later this month by 25 basis points from its current target rate of 1.75%-2.0%.
Expectations of a rate cut were 78.6% on Friday, compared to 88.7% on Thursday and 39.6% on Monday, according to CME Group’s FedWatch tool.
The Labor Department on Friday reported - in addition to job growth in September - that the unemployment rate dropped to near a 50-year low of 3.5%, easing some market concerns about an imminent recession. However, the monthly report also showed wage growth stagnating and manufacturing payrolls declining for the first time in six months, evidence that economic softness induced by the U.S.-China trade war has begun to spread to the labor market.
The data followed a string of weak economic reports earlier this week, including a plunge in manufacturing activity to a more than 10-year low in September and a sharp slowdown in services industry growth to levels last seen in 2016.
“The September jobs report provided a welcome relief to a market hammered by a string of downside surprises, with figures that beat estimates overall despite a lean 136,000 headline payroll gain,” wrote Mike Englund, principal director and chief economist for Action Economics.
The benchmark 10-year yield was down 1.7 basis points to 1.519%, pushing down the spread between two- and 10-year yields to 11.5 basis points. The spread - the traditional measure of the yield curve - was 14.2 basis points at last close, almost 10 basis points higher than where it began the week.
“Though today’s jobs report provided relief to Fed policymakers, we think the jolt to market sentiment over the past week has been enough to push the Fed to easy policy by a quarter point at the October 29-30 FOMC meeting. Though the market has largely priced in this move, it’s noteworthy that the economy likely continues to outpace most Fed estimates, and the median estimates from the FOMC meeting just two weeks ago showed no further change in the policy rate in either 2019 or 2020,” said Englund. (Reporting by Kate Duguid Editing by Nick Zieminski, Paul Simao and Tom Brown)