(Updated at 1430 EDT)

By Karen Brettell

NEW YORK, Sept 6 (Reuters) - Benchmark 10-year Treasury

yields fell to a 15-month low on Friday before paring back in

choppy trading as August's payrolls report failed to offer a

clear signal on the size of an expected Federal Reserve interest

rate cut later this month.

Nonfarm payrolls increased by 142,000 jobs last month after

a downwardly revised 89,000 rise in July. Economists polled by

Reuters had forecast payrolls increasing by 160,000 jobs.

The unemployment rate fell to 4.2%, from 4.3% the prior

month.

"The market's really struggling with this one because it's

really in the middle of what could be used as a justification

for either a 25 or 50 basis point rate cut," said Gennadiy

Goldberg, head of U.S. rates strategy at TD Securities in New

York.

U.S. 10-year Treasury yields were last down 2.5

basis points at 3.708% and earlier fell as low as 3.648%, the

lowest since June 2023.

Interest rate-sensitive two-year yields fell 10.6

basis points to 3.646% and reached 3.595%, the lowest since

March 2023.

The closely watched yield curve between two- and 10-year

notes was at 6 basis points, the steepest since

July 2022.

The bond market is pricing in an aggressive path of rate

cuts over the coming year and a half, even as many economists

see the U.S. avoiding a recession.

Fed funds futures traders are now pricing a 73% chance of a

25 basis point cut at the Fed's Sept. 17-18 meeting, and a 27%

chance of a 50 basis point reduction, according to the CME

Group's FedWatch Tool.

In total 251 basis points of cuts are priced in by the end

of 2025.

""The payroll report suggests there is no reason for the

Federal Reserve to rush," said Drew Matus, chief market

strategist at MetLife Investment Management in New Jersey. "The

labor market is slowing, but at a slow pace, allowing the Fed to

move more deliberately in September."

Some of the underlying details of Friday's report, including

downward revisions of 86,000 jobs gains for the past two months,

however, may be a warning that the labor market is not as

healthy as hoped.

"We do see the labor market really not just coming into

balance, but really starting to cool off quite significantly,

which could make the Fed quite nervous," said TD's Goldberg.

Fed policymakers on Friday said they are ready to lower

interest rates at the U.S. central bank's meeting in two weeks,

with one of them saying he could support back-to-back

reductions, or a bigger cut in borrowing costs, should the

cooling labor market need support.

The Treasury next week will sell $119 billion in

coupon-bearing supply, including $58 billion in three-year notes

on Tuesday, $39 billion in 10-year notes on Wednesday and $22

billion in 30-year bonds.