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Solid jobs data raise bets on September U.S. rate hike

Job seeker Tomaj Trenda (L) hands over papers to a company representative as he looks for work at a career fair in San Francisco, California July 14, 2015. REUTERS/Robert Galbraith

By Richard Leong

NEW YORK (Reuters) - Traders anticipated on Friday higher chances the U.S. Federal Reserve would raise interest rates in September following a solid July payroll report, but it remained a close call for the first such move for the Fed in nearly a decade.

Interest rates futures fell on the day but held above their session lows, while Treasury bill rates climbed with the six-month rate hitting its highest level since late 2010.

The U.S. Labor Department said U.S. employers added 215,000 workers in July, less than the 223,000 increase forecast. The slightly smaller-than-expected rise last month was offset by upward revisions on hiring in May and June.

"It's a solid but not spectacular report," said Jennifer Vail, head of fixed income research at U.S. Bank Wealth Management in Portland, Oregon.

Vail and other analysts said Fed policymakers might decide to delay a rate increase to December unless they see further evidence of wage gains, which they view as critical to support consumer spending and the broader economy.

Still more tightening of the labour market with the jobless rate holding at a seven-year low of 5.2 percent should offer the Fed some confidence that salaries would grow at a swifter pace.

"We think that as the labour market recovery matures, we are likely to witness an extension in the workweek for hourly employees, as well as stronger wage growth in the future," Rick Rieder, BlackRock's chief investment officer of fundamental fixed income, said in a statement.

Futures on the federal funds rates which the Fed targets to achieve its policy objectives fell modestly (FFU5) (FFZ5), implying traders place a higher chance the Fed might end its near-zero rate policy next month. [FED/DIARY]

U.S. overnight indexed swap rates (USD3MOIS=) rose after the latest jobs data.

They suggested traders were pricing a 55 percent chance the Fed would raise rates in September (USDFOMCOISM1=PYNY), up from 47 percent prior to the data, according to data from Tullett Prebon.

In the T-bill sector, three-month rates (US3MT=RR) doubled to 0.065 percent, while six-month rates rose 3 basis points to 0.210 percent after hitting their highest level since December 2010.

In a Reuters poll conducted on Friday after the jobs data, 13 of 19 top Wall Street banks expected the Fed to raise rates in September.

(Reporting by Richard Leong; Editing by Meredith Mazzilli)