(Refiles to change Kremer's title to chief investment officer, not co-chief, in paragraph 3)
By Chuck Mikolajczak
NEW YORK, Dec 1 (Reuters) -
U.S. Treasury yields dropped on Friday after Fed Chair Jerome Powell sounded caution on the central bank's interest rate outlook and data showed a continued manufacturing slump.
Yields extended declines after Powell said the risks of the Fed moving too far with rate hikes and slowing the economy more than necessary have become "more balanced" with those of not moving rapidly enough to combat high inflation.
"What Powell's comments just suggested to us is that the Fed is at the end of the rate hike cycle or very close to it, supported by some of the 'balanced' comments," said Dylan Kremer, chief investment officer at Certuity in Miami.
"The market is getting too aggressive in pricing a Fed cut in March. We think the Fed will keep rates higher than the market expects to ensure that they stamp out inflation because what their worst fear is, is reacceleration."
The market is pricing in a greater than 60% chance of a rate cut in March, according to CME's
, up from about 43% on Thursday.
Earlier in the session, yields had dipped after the Institute for Supply Management (ISM) said its manufacturing PMI was unchanged at 46.7 last month, below the 47.6 estimate of economists polled by Reuters. It was the 13th straight month the PMI stayed below 50, which indicates contraction.
The yield on the benchmark 10-year U.S. Treasury note fell 9 basis points (bps) to 4.261% and is down nearly 23 bps for the week.
Yields have fallen sharply in recent weeks, with the 10-year U.S. Treasury yield closing out November on Thursday with its biggest monthly drop since August 2011. Softening economic data have heightened expectations the Fed is done with hiking rates and investors are attempting to time the central bank's first rate cut.
Many Fed officials have refused to rule out the possibility of another hike should economic data change course, but Fed Governor Christopher Waller, seen as a hawk, flagged the a possible rate cut if inflation continues to decline earlier this week.
Powell is also expected to speak again at 2 p.m. ET on Friday.
The yield on the 30-year Treasury bond declined 6 basis points to 4.448%.
A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year notes , an indicator of economic expectations, was at a negative 36.64 basis points after rising to a negative 33.83, its shallowest inversion since Nov. 8.
The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, fell 12 basis points to 4.598% after closing out November with its biggest monthly drop since March. The yield declined to 4.569%, its lowest since June 13.
The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.163% after closing at 2.176% on Nov. 30.
The 10-year TIPS breakeven rate was last at 2.238%, indicating the market sees inflation averaging about 2.2% a year for the next decade.
(Reporting by Chuck Mikolajczak; editing by Philippa Fletcher and Richard Chang)