TREASURIES-Yields curve flattens ahead of U.S. jobs data

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NEW YORK, Oct 1 (Reuters) - Yields on longer-dated Treasury bonds on Thursday afternoon retraced earlier gains, driving the yield curve flatter, as investors waited for closely watched federal jobs data to be released Friday morning.

The spread between two- and 10-year yields flattened to 54.3 basis points in mid-afternoon trade after having risen to a month high of 58.2 basis points earlier in the day. The swings have primarily been driven by moves at the long end of the curve. Short-term yields have been anchored by the Federal Reserve’s commitment to keeping interest rates near zero for the foreseeable future.

Though longer-dated yields rose earlier on Thursday on the prospect of progress in negotiations in Washington over a stimulus package, that move was erased by reports of a deadlock in talks.

U.S. House Speaker Nancy Pelosi and Treasury Secretary Steven Mnuchin remained far from agreement on COVID-19 relief after they failed in a phone discussion to bridge what Pelosi described as differences over dollars and values.

Also hampering yields was weaker-than-expected Institute for Supply Management (ISM) data.

“Treasuries put in a solid bear steepening effort this morning as the 2s/10s curve reached 58 bp and 10s touched 71.8 bp, only to be retraced following an unexpected decline in ISM manufacturing,” said Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets.

U.S. manufacturing activity unexpectedly slowed in September as new orders retreated from a more than 16-1/2-year high, in line with expectations of a moderation in economic growth after a fiscal stimulus boost over the summer.

“While the production sector gauge remained comfortably above the pivotal 50 mark, the first drop in new orders since April and the lowest level for consumer inventories since 2010 brings into question the near-term direction of the real economy,” said Lyngen.

The slowdown in manufacturing activity last month supports views that the recovery from the COVID-19 recession is losing steam as government money to help businesses and millions of unemployed runs out. In addition, new coronavirus cases are rising and infections are expected to accelerate in the fall.

The government’s employment report is expected to show 850,000 jobs were created in September after adding 1.371 million in August, according to a Reuters survey of economists. That would leave nonfarm payrolls about 10.7 million below their pre-pandemic level.

In afternoon trade, the benchmark 10-year yield was flat at 0.676% and the 30-year yield was also flat at 1.452%. (Reporting by Kate Duguid; Editing by Will Dunham and Cynthia Osterman)