TREASURIES-Yields lower after strong payroll data puts focus on Fed

 (Updates with market activity, analyst comment, details on
    By Ross Kerber
    July 2  (Reuters) - U.S. Treasury yields were lower on
Friday after a strong payroll report left uncertainty about how
the Federal Reserve might respond.
    The benchmark 10-year yield was down 3.9 basis
points at 1.4407% in midday trading. That was close to its level
before the morning release of new Labor Department data showed
U.S. job growth accelerated in June.
    Nonfarm payrolls increased by 850,000 jobs last month after
rising 583,000 in May, the Labor Department said in its closely
watched employment report on Friday. The unemployment rate rose
to 5.9% from 5.8% in May.
    Treasury yields initially ticked up on the strong job gains,
then fell back. Market analysts said the trading reflected mixed
interpretations about how the Fed might incorporate the new
information as it decides how to end crisis-era bond-buying.
    Normally strong numbers would send yields higher, said Priya
Misra, global head of rates strategy for TD Securities in New
York. Of Friday's trading, she said, "I think the market is torn
between whether to price in the market outlook or the Fed
    The minutes of the Fed's June 16-17 meeting, when officials
opened debate on how to end crisis-era bond-buying and signaled
interest rate increases were closer on the horizon than
previously thought, are due out on Wednesday.
    Tom di Galoma, managing director of Seaport Global Holdings,
said he does not expect yields to move much higher until closer
to the fall when schools move to reopen, bringing more teachers
and other educators back to work and dropping the unemployment
    "I think we're geared toward a fairly decent reopening but
most of it will take place in the fall. Rates will head higher
once that becomes evident," he said.
    Friday's trading was set for an early close ahead of the
long Independence Day weekend.
    A closely watched part of the U.S. Treasury yield curve
measuring the gap between yields on two- and 10-year Treasury
notes, seen as an indicator of economic
expectations, was at 120 basis points, less than a basis point
lower than Thursday's close. 
   The two-year U.S. Treasury yield, which typically
moves in step with interest rate expectations, was down 1.7
basis points at 0.2396%.
    The yield on 30-year Treasury Inflation Protected Securities
 was at -0.209% after reaching as low as -0.236%
The 10-year TIPS yield was at -0.905% and the
breakeven inflation rate was at 2.338%.
      July 2 Friday 12:32PM New York / 1632 GMT
                               Price        Current   Net
                                            Yield %   Change
 Three-month bills             0.0475       0.0482    0.000
 Six-month bills               0.0525       0.0532    0.002
 Two-year note                 99-198/256   0.2396    -0.017
 Three-year note               99-110/256   0.4453    -0.026
 Five-year note                100-8/256    0.8686    -0.033
 Seven-year note               100-80/256   1.2032    -0.042
 10-year note                  101-176/256  1.4407    -0.039
 20-year bond                  104-64/256   1.9898    -0.029
 30-year bond                  107-32/256   2.0545    -0.031
   DOLLAR SWAP SPREADS                                
                               Last (bps)   Net       
 U.S. 2-year dollar swap         7.50        -0.50    
 U.S. 3-year dollar swap        11.25        -1.00    
 U.S. 5-year dollar swap         7.50        -0.50    
 U.S. 10-year dollar swap       -2.25        -0.25    
 U.S. 30-year dollar swap      -31.25        -0.25    
 spread (Reporting by Ross Kerber in Boston
Editing by Chizu Nomiyama; Kirsten Donovan)