By Davide Barbuscia

NEW YORK The U.S. Treasury yield surge that has shaken markets in recent weeks may have further room to run, after a stunningly strong U.S. jobs report bolstered the case for more tightening from the Federal Reserve.

Jobs growth for September were nearly double expectations with nonfarm payrolls increasing by 336,000 for the month, strengthening views that policymakers will need to keep interest rates elevated to cool inflation.

That’s bad news for investors who were looking for a respite from a rise in Treasury yields that has wreaked havoc throughout markets over the past month, bruising stocks, supercharging the dollar and pushing mortgage rates to their highest levels in more than two decades. Treasury yields move inversely to bond prices.

“It’s quite a report,” said Peter Cardillo, chief market economist at Spartan Capital Securities. “The likelihood of a Fed hike in November has risen. This is not what the market was looking for.”

Two-year yields, which move more closely in line with monetary policy expectations, jumped by about six basis points after the report while benchmark 10-year yields surged over 10 basis points to nearly 4.9%. On the long end of the curve, 30-year yields surged above 5% hitting their highest since 2007.

The S&P 500 was down 0.9% and is 8% off from its July high.

Ian Lyngen, head of US rates strategy at BMO Capital Markets, believes a 5% yield for 10-year notes may be on the horizon. "Such a selloff will have ramifications across financial markets and the real economy -- particularly if the move proves sustainable into year end," he said in a note.

Fed funds futures traders added to bets that the Federal Reserve will raise interest rates before the end of the year, and keep them elevated for longer next year. Implied yields on contracts tied to the Fed policy rate pointed to a nearly 50% chance the Fed will lift the benchmark short-term borrowing rate a quarter of a percentage point to the 5.50%-5.75% range at its December meeting.

"This market's current concern is interest rates more than anything else. Numbers that suggest higher-for-longer rates will be seen as negative for equities,” said Rick Meckler, partner at Cherry Lane Investments. “At least for today investors are concerned that rates across the curve might move higher."

For some investors, however, further increases in yields could be limited given the weakness already seen in bonds in recent weeks. The restrictive level of interest rates on the economy could also be seen as an opportunity to add longer dated bonds, said Candice Tse, global head of strategic advisory solutions at Goldman Sachs Asset Management.

"The starting point of yields and expectation that the Fed has reached, or will soon reach, their terminal rate makes for an opportune time to extend duration and add high quality bonds," she said in a note.

(Reporting by Davide Barbuscia, Stephen Culp, Sruthi Shankar; Editing by Ira Iosebashvili and Chizu Nomiyama)