(Recasts, updates yields, adds Eurodollar futures, analyst comments, and upcoming auctions) By Karen Pierog CHICAGO, May 7 (Reuters) - U.S. Treasury yields fell to two-month lows on Friday after data showed a much smaller-than-expected jobs gain in April, but later bounced higher, with yields on longer-dated debt rising for the session. The benchmark 10-year yield, which dropped to 1.469%, the lowest since March 4, was last up 1.6 basis points at 1.5771%, holding below a 14-month high of 1.776% reached on March 30. The 30-year yield tumbled to its lowest level since March 1 at 2.158%. It was last 3.6 basis points higher at 2.2723%. Nonfarm payrolls increased by only 266,000 jobs last month after rising by 770,000 in March, the Labor Department reported. Economists polled by Reuters had forecast payrolls advancing by 978,000 jobs. The unexpected slowdown in job growth was likely due to shortages of workers and raw materials as the economy recovers from the coronavirus pandemic. The yield drop was a "knee-jerk reaction" that faded as the session wore on and the market digested the data, according to analysts. "Despite a huge miss, which it was, it"s still employment going in the right direction," said Andrew Richman, senior fixed income strategist at Sterling Capital Management. John Canavan, lead analyst at Oxford Economics, said the report reinforced the idea the Federal Reserve can stay on its present course for longer, which led to intermediate yields outperforming longer-dated yields, steepening the five-year note to 30-year bond curve. "As market participants pile into curve steepening trades, part of that results in selling of the long end," he said. That yield curve was last about 6 basis points steeper at 149.75 basis points. U.S. interest rate futures indicated that traders pushed out expectations of a Fed rate hike by roughly three months after the payrolls report"s release. Eurodollar futures, which are a proxy for interest rate expectations, showed a 90% chance of an interest rate hike in March 2023, and fully priced in a hike in June 2023. Prior to the report, investors were betting there was a 90% chance of a hike in December 2022, and a 100% chance in March 2023. Inflation expectations temporarily eased in the wake of the jobs data with the breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) falling as low as 2.586% from 2.661% at the previous close. It was last at 2.683%, down from a 10-year high of 2.696% reached on Wednesday. The 10-year TIPS breakeven rate also rebounded after falling. It was last at 2.497%, the highest since April 2013. "The Fed"s being extremely easy here still. We have stimulus coming on. It"s inflationary in the short run," Richman said. The two-year Treasury yield, which typically moves in step with interest rate expectations, was last 1 basis point lower at 0.1468%. A closely watched part of the yield curve that measures the gap between yields on two- and 10-year Treasury notes was about 2 basis points steeper at 143.20 basis points. Next week will bring a burst of supply, with the U.S. Treasury auctioning $58 billion of three-year notes on Tuesday, $41 billion of 10-year notes on Wednesday, and $27 billion of 30-year bonds on Thursday. May 7 Friday 2:00PM New York / 1800 GMT Price Current Net Yield % Change (bps) Three-month bills 0.015 0.0152 0.000 Six-month bills 0.035 0.0355 -0.005 Two-year note 99-245/256 0.1468 -0.010 Three-year note 100-64/256 0.2893 -0.022 Five-year note 99-226/256 0.7741 -0.022 Seven-year note 100-18/256 1.2394 -0.004 10-year note 95-236/256 1.5771 0.016 20-year bond 95-112/256 2.1597 0.033 30-year bond 91-112/256 2.2723 0.036 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 10.25 -0.50 spread U.S. 3-year dollar swap 13.00 -0.75 spread U.S. 5-year dollar swap 9.00 -0.75 spread U.S. 10-year dollar swap -2.25 -0.75 spread U.S. 30-year dollar swap -28.25 -1.25 spread (By Karen Pierog; additional reporting by Ann Saphir and Kate Duguid Editing by Sonya Hepinstall) Our Standards: The Thomson Reuters Trust Principles.