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TREASURIES-Yields stable despite February job growth below forecasts

Kate Duguid

(Recasts first paragraph; adds paragraphs on Fed, ECB; updates yields)

NEW YORK, March 8 (Reuters) - Treasury yields were modestly higher and relatively stable on Friday even though U.S. job growth dropped unexpectedly in February, with the economy creating only 20,000 jobs, a 93 percent drop from the prior month, amid a contraction in payrolls in construction and several other sectors.

This could raise concerns about a sharp slowdown in economic activity and adds to the Federal Reserve's case for putting its interest-rate hiking cycle on hold. Although yields initially fell, they were higher across maturities by a basis point or less, suggesting the market believes this could be a one-off event.

The "Treasury yield moves speak to (the market's) willingness to look through this," said Jonathan Hill, U.S. rates strategist at BMO Capital Markets. "We've seen similarly low levels before. May 2016 was 15,000. September 2017 was 18,000. So if its a one-off month of weak job growth and we return to that 200,000 level, there will be a willingness to look through this read."

While February's job growth was the weakest since September 2017, other details of the closely followed employment report were strong. The unemployment rate fell back to below 4 percent and annual wage growth was the best since 2009.

A broader measure of unemployment, which includes people who want to work but have given up searching and those working part-time because they cannot find full-time employment, dropped to 7.3 percent after hitting an 11-month high of 8.1 percent in January because of the partial U.S. government shutdown.

The 10-year Treasury yield, a proxy for investor sentiment about the overall health of the economy, was half a basis point higher at 2.641 percent. The two-year yield , which reflects traders' expectations for interest rate hikes, was 0.2 basis point lower, last at 2.465.

In response to softer data and financial market volatility, Federal Chair Jerome Powell in January said the central bank would pause its post-crisis monetary policy tightening. On Friday morning, 77.2 percent of traders had priced out the possibility of a rate hikes in 2019, according to CME Group's FedWatch tool.

On Thursday, the European Central Bank announced it would delay its first post-crisis interest rate hike until 2020 and offered banks a fresh round of loans to prevent a credit crunch that could worsen the European Unions economic slowdown.

"Is the dovish Fed and the dovish move from the ECB enough to make this a one-off quarter before growth reasserts itself? Or are we starting to enter the end game of this cycle?" asked Hill of BMO Capital Markets. (Reporting by Kate Duguid Editing by Chizu Nomiyama and Jonathan Oatis)