(Adds analyst quote; updates yields)
By Kate Duguid
NEW YORK, Oct 3 (Reuters) - Treasury yields were lower for the sixth straight session on Thursday, with the two-year yield at its lowest since September 2017, after U.S. service sector growth hit its slowest pace in three years last month.
The Institute for Supply Management (ISM) said its index of non-manufacturing activity fell to 52.6 from 56.4 the previous month. The reading was below expectations of 55.0 from a Reuters poll of 67 economists and was the lowest since August 2016. The survey of purchasing managers also showed that job growth in the largest slice of the U.S. economy was the weakest in half a decade.
"Yields are dropping like stones after the weaker-than- expected ISM services and factory data added to recession worries," wrote analysts at Action Economics. "The weak service sector report signals downside risk for Q3 GDP as well as tomorrow's job report."
Yields across maturities were lower, with the two-year Treasury yield, which is a proxy for investor expectations of interest rate moves, down 9.2 basis points to 1.392%, extending a 7.2 basis point fall on Wednesday.
Expectations the Federal Reserve will cut rates by 25 basis points from its current target rate of 1.75%-2.0% in October jumped to 92.5% on Thursday from 39.6% on Monday, according to CME Group's FedWatch tool.
An October rate cut "is certainly a possibility but it is still not our baseline. But the Fed is certainly data-dependent and if that data weakens enough, then they will respond. That said, we do continue to see the Fed as reactive rather than proactive, which is why even though the market was pricing in a greater chance of Fed cuts, we are not seeing that translate into higher inflation expectations," said Michael Pond, head of global inflation-linked research at Barclays.
In a separate report, the Commerce Department said new factory orders slipped in August and business spending on equipment was much weaker than initially thought.
Thursday's data comes on the heels of a survey from ISM on Tuesday that showed a measure of national factory activity tumbled to more than a 10-year low in September, as trade tensions between China and the United States strained business conditions. National factory activity fell to 47.8; a reading below 50 signals the sector is contracting.
The benchmark 10-year Treasury yield was last down 4.4 basis points to 1.550%, with the 30-year bond yield last down 2.9 basis points to 2.059%.
Reporting by Kate Duguid; Editing by Dan Grebler