Benchmark 10-year Treasury yields fell on Friday, but came off of a 15-month low, after August's payrolls report showed employers added fewer jobs than economists had anticipated but did not provide clear guidance on how large an expected Federal Reserve rate cut is likely to be later this month.

Nonfarm payrolls increased by 142,000 jobs last month after a downwardly revised 89,000 rise in July. Economists polled by Reuters had forecast payrolls increasing by 160,000 jobs.

The unemployment rate fell to 4.2%, from 4.3% the prior month.

“I think the market's really struggling with this one because it's really in the middle of what could be used as a justification for either a 25 or 50 basis point rate cut,” said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities in New York.

U.S. 10-year Treasury yields were last down 0.2 basis points at 3.731% and fell as low as 3.657%, the lowest since June 2023.

Interest rate sensitive two-year yields fell 4.6 basis points to 3.704% and reached 3.642%, the lowest since March 2023.

The closely watched yield curve between two- and 10-year notes was at 2.5 basis points and reached 3.4 basis points, the steepest since July 2022.

The bond market is pricing in an aggressive path of rate cuts over the coming year and a half even as many economists see the U.S. as avoiding a recession.

Fed funds futures traders are now pricing a roughly 50/50 chance of a 25 or 50 basis points cut at the Fed's Sept. 17-18 meeting, according to the CME Group's FedWatch Tool.

In total 241 basis points of cuts are priced in by the end of 2025.

New York Fed President John Williams said Friday that a better balanced economy has opened the door to cutting rates, with the full course of action to be determined by how the economy performs.

(Reporting By Karen Brettell Editing by Christina Fincher and Alex Richardson)