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NEW YORK, Aug 4 (Reuters) - U.S. interest rate futures fell on Friday as a solid July payrolls report indicated further tightening in the labor market, spurring some traders to bet the Federal Reserve may raise rates at its December policy meeting.
Domestic employers added 209,000 workers last month, more than what analysts had forecast, while average hourly earnings grew by 0.3 percent in line with expectations, the Labor Department said on Friday.
The latest payrolls report caused a selloff in the fixed income market, propelling short-term rates and bond yields higher.
"Yields are up with a solid jobs report across the board," said Bryce Doty, senior portfolio manager with Sit Investment Associates in Minneapolis.
Federal funds futures implied traders saw a 50 percent chance Fed policy-makers would raise key overnight borrowing costs by a quarter point to 1.25-1.50 percent at their Dec. 12-13 meeting . That's up from 46 percent shortly before the release of the July payrolls report, CME Group's FedWatch program showed.
Traders have been on the fence whether the central bank may raise rates for a third time in 2017 following quarter-point rate hikes in March and June even as inflation has softened since this spring.
They also reckoned the Fed may be reticent to squeeze in another rate increase this year as policy-makers have signaled the central bank may announce a plan to slow its reinvestment in Treasuries and mortgage-backed securities in September.
Fed funds futures suggested traders did not fully price in another rate increase until late 2018. (Reporting by Richard Leong; Editing by Bernadette Baum and W Simon)