TREASURIES-Yields whipsaw following 'dismal' ISM report; 10-year dips below 4%

(Recasts first paragraph, updates headline, adds analyst quote, updates market activity) By David Randall NEW YORK, Jan 5 (Reuters) - U.S. Treasury yields reversed course and tumbled Friday after a strong jobs report and an unexpectedly weak reading of the services sector gave clashing views of the strength of the U.S. economy. Yields, which move in the opposite direction of prices, popped to three-week highs early in the trading session following a better-than-expected nonfarm payrolls report. Yet yields nosedived, taking the 10-year Treasury back below 4%, after the Institute for Supply Management (ISM) said service sector employment plunged to 43.3 last month, the lowest level since July 2020. The index was at 50.7 in November. Jobs have become a focus for markets as investors look to anticipate the timing of the first interest rate cut by the Federal Reserve. Persistent strength in the labor market threatens to accelerate inflation, forcing the Fed to maintain or raise rates after its most aggressive rate-hiking cycle since the early 1980s. "I don't know how to classify this (ISM) report other than to say it was absolutely dismal," said Jeff Klingelhofer, co-head of investments for Thornburg Investment Management. "One data print is one data print but currently you have two very different reads into the employment side of the consumer equation." Futures markets whipsawed following the ISM report. Markets are now pricing in a 24% chance that the Fed keeps benchmark rates at their current range of 5.25% to 5.5% at its March meeting, down from a 44% chance seen shortly after the nonfarm payrolls report, according to CME's FedWatch Tool. Markets are pricing in a 71% chance of a 25 basis point rate cut, up from a 53% chance seen earlier in the day. Overall, markets see the Fed cutting rates by a total of 143 basis points by the end of the year, down from expectations of more than 160 basis points in cuts two weeks ago. Despite Friday's volatility, "markets are starting a new year and comparing their expectations with the Fed and with the data and saying there's a disconnect here," said Chris Gunster, head of fixed income at Fidelis Capital. "Now you're starting to see yields back up and we think we're going to see more of that as the year moves on." The yield on 10-year Treasury notes was down 2.3 basis points at 3.968%. It is up approximately 20 basis points from its level at the end of December. The yield on the 30-year Treasury bond was unchanged at 4.135%. The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was down 5.1 basis points at 4.331%. January 5 Friday 10:54AM New York / 1554 GMT Price Current Net Yield % Change (bps) Three-month bills 5.2275 5.3826 -0.012 Six-month bills 5.0325 5.2477 -0.026 Two-year note 99-217/256 4.3307 -0.051 Three-year note 100-190/256 4.103 -0.046 Five-year note 99-42/256 3.9364 -0.037 Seven-year note 98-184/256 3.9618 -0.034 10-year note 104-72/256 3.9701 -0.021 20-year bond 106-20/256 4.2916 -0.003 30-year bond 110-124/256 4.135 0.000 (Reporting by David Randall; Editing by Susan Fenton, Barbara Lewis and Jonathan Oatis)