TREASURIES-Yields race higher, pushing 10-year above 4% after strong jobs report

(Adds milestones, adds 2/10 inversion, updates market activity)

By David Randall

NEW YORK, Feb 2 (Reuters) - U.S. Treasury yields surged on Friday, with the 10-year Treasury yield marking its largest one-day advance since Sept. 2022, after the monthly jobs report blew past expectations, dashing hopes for imminent interest rate cuts by the Federal Reserve.

Markets now expect the Federal Reserve to cut benchmark interest rates by 127 basis points by year-end, down sharply from more than 160 basis points expected a month ago. Futures markets are now pricing in just a 21% chance of a rate cut after the Fed's March meeting, down from a nearly 80% chance in early January, according to CME's FedWatch Tool.

"The bond market is having to reprice a lot of the rate cuts that were expected over the course of 2024 because job growth completely outperformed expectations," said Lawrence Gillum, chief fixed income strategist for LPL Financial. "It's been a pretty busy week with Fed meetings and Treasury announcements and regional bank concerns, but today's jobs report is moving the market the most."

The Fed said on Wednesday it would keep benchmark interest rates at their current range until it saw continuing signs that inflation was falling.

The 10-year Treasury note yield was up 16.3 basis points to 4.026%, one day after reaching a new 2024 low. On the week, however, the 10-year was still down 29.7 basis points, the largest weekly decline since the week of Dec. 11.

The 30-year Treasury bond yield was up 11.7 basis points at 4.220%.

"After the FOMC meeting on Wednesday, we maintained confidence in our expectation of a March rate cut. After today's data, however, it is hard to see how that is going to happen," said Thomas Simons, US economist at Jefferies.

The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was up 17.8 basis points at 4.372%, near its highest level since mid-January. Its gain Friday was its largest one-day advance since May 2023.

Nonfarm payrolls increased by 353,000 jobs last month, the Labor Department's Bureau of Labor Statistics said on Friday. Data for December was revised higher to show 333,000 jobs added instead of 216,000 as previously reported. Economists polled by Reuters had forecast payrolls increasing 180,000 in January.

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 -34.8 basis points, its most inverted state in a month. (Reporting by David Randall; Editing by Hugh Lawson, Susan Fenton, Richard Chang and Deepa Babington)