By David Randall
       NEW YORK, Jan 4 (Reuters) - U.S. Treasury yields
extended gains on Thursday, with the benchmark 10-year yield
hovering around 4%, as data suggesting the U.S. labor market
remains strong tempered expectations of an interest rate cut by
the Federal Reserve at its March meeting.
    Futures markets are now pricing in a 35% chance that the Fed
keeps rates at their current range of 5.25% to 5.5%, up from a
13% chance a week ago, according to CME's FedWatch Tool. Markets
estimate a 60% chance of a 25-basis-point rate cut in March.
    The number of Americans filing initial claims for
unemployment benefits, known as jobless claims, fell more than
expected to 202,000 last week, below consensus estimates of
216,000, according to the Labor Department. New state
unemployment benefit claims rose by 12,000 last week to 218,000.
    At the same time, U.S. private employers hired more workers
than expected in December, according to the ADP National
Employment Report. Private payrolls increased by 164,000 jobs
last month, the largest monthly increase since August.
    "People are looking at the labor market data and starting to
second-guess whether that is enough for the Fed to cut rates,"
said Matthew Routh, a portfolio manager at Barrow Hanley Global
Investors.
    The yield on 10-year Treasury notes was up 8.8
basis points to 3.995%. Its yield, which moves in the opposite
direction of prices, briefly traded above 4% Wednesday, but has
not maintained that level since falling below 4% in
mid-December. Yields of the benchmark 10-year are up about 15
basis points over the first three trading days of the new year.
        The yield on the 30-year Treasury bond was
up 8.8 basis points at 4.145%. The two-year U.S.
Treasury yield, which typically moves in step with interest rate
expectations, was up 7.5 basis points at 4.393%. 
        Minutes from the Fed's December policy meeting released
Wednesday showed a majority of policymakers see benchmark rates
trimmed by at least three-quarters of a percentage point by the
end of the year. Markets, meanwhile, are pricing in six rate
cuts over the same time, totaling 140 basis points. 
        "The market is ahead of itself and is not listening to
what the Fed is saying," said Judith Raneri, a portfolio manager
at Gabelli Funds. At the same time, increased corporate bond
issuance will likely increase volatility in the fixed income
market overall, she said.
        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 -39.9 basis points. It fell to a low of
-43.2 on Wednesday.
        
  
        January 4 Thursday 1:14PM New York / 1814 GMT
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             5.2375       5.3954    -0.004
 Six-month bills               5.055        5.274     -0.003
 Two-year note                 99-185/256   4.397     0.079
 Three-year note               100-150/256  4.1606    0.091
 Five-year note                98-244/256   3.9835    0.092
 Seven-year note               98-112/256   4.0086    0.097
 10-year note                  104-4/256    4.0025    0.095
 20-year bond                  105-208/256  4.311     0.099
 30-year bond                  110-44/256   4.1522    0.095
 
 (Reporting by David Randall)