(Updates with market activity, analyst comment, details on TIPS) By Ross Kerber July 2 (Reuters) - U.S. Treasury yields were lower on Friday after a strong payroll report left uncertainty about how the Federal Reserve might respond. The benchmark 10-year yield was down 3.9 basis points at 1.4407% in midday trading. That was close to its level before the morning release of new Labor Department data showed U.S. job growth accelerated in June. Nonfarm payrolls increased by 850,000 jobs last month after rising 583,000 in May, the Labor Department said in its closely watched employment report on Friday. The unemployment rate rose to 5.9% from 5.8% in May. Treasury yields initially ticked up on the strong job gains, then fell back. Market analysts said the trading reflected mixed interpretations about how the Fed might incorporate the new information as it decides how to end crisis-era bond-buying. Normally strong numbers would send yields higher, said Priya Misra, global head of rates strategy for TD Securities in New York. Of Friday"s trading, she said, "I think the market is torn between whether to price in the market outlook or the Fed reaction." The minutes of the Fed"s June 16-17 meeting, when officials opened debate on how to end crisis-era bond-buying and signaled interest rate increases were closer on the horizon than previously thought, are due out on Wednesday. Tom di Galoma, managing director of Seaport Global Holdings, said he does not expect yields to move much higher until closer to the fall when schools move to reopen, bringing more teachers and other educators back to work and dropping the unemployment rate. "I think we"re geared toward a fairly decent reopening but most of it will take place in the fall. Rates will head higher once that becomes evident," he said. Friday"s trading was set for an early close ahead of the long Independence Day weekend. A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at 120 basis points, less than a basis point lower than Thursday"s close. The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was down 1.7 basis points at 0.2396%. The yield on 30-year Treasury Inflation Protected Securities was at -0.209% after reaching as low as -0.236% The 10-year TIPS yield was at -0.905% and the breakeven inflation rate was at 2.338%. July 2 Friday 12:32PM New York / 1632 GMT Price Current Net Yield % Change (bps) Three-month bills 0.0475 0.0482 0.000 Six-month bills 0.0525 0.0532 0.002 Two-year note 99-198/256 0.2396 -0.017 Three-year note 99-110/256 0.4453 -0.026 Five-year note 100-8/256 0.8686 -0.033 Seven-year note 100-80/256 1.2032 -0.042 10-year note 101-176/256 1.4407 -0.039 20-year bond 104-64/256 1.9898 -0.029 30-year bond 107-32/256 2.0545 -0.031 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 7.50 -0.50 spread U.S. 3-year dollar swap 11.25 -1.00 spread U.S. 5-year dollar swap 7.50 -0.50 spread U.S. 10-year dollar swap -2.25 -0.25 spread U.S. 30-year dollar swap -31.25 -0.25 spread (Reporting by Ross Kerber in Boston Editing by Chizu Nomiyama; Kirsten Donovan) Our Standards: The Thomson Reuters Trust Principles.