US Treasury debt rallied on Friday as another month of mediocre job creation eased fears the Federal Reserve might kick up the pace of interest rate increases. January payrolls showed the net creation of 146,000 jobs, well short of forecasts of 190,000 and market chatter of an even higher reading. The data fuelled a spike of 23/32 in 10-year note prices, taking yields to 4.08 percent from 4.15 percent on Thursday. At the height of the price gains, benchmark yields touched a three-month low of 4.06 percent.
Softness in average earnings also suggested the labour market would not likely fuel a spike in inflation any time soon, further bolstering the long end.
Thirty-year bonds rose 1-22/32 to yield 4.48 percent, down from 4.58 percent late on Thursday and the lowest since mid-2003.
The market was still expecting further rate rises from the Fed, but the weak jobs numbers certainly quelled anxiety about a possible move toward more aggressive monetary tightening.
"A month ago, we were talking about the Fed stepping up the pace of tightening," recalled Christopher Low, chief economist at FTN Financial. "This certainly doesn't prevent them from tightening, but probably puts them on alert."
Accordingly, a surge in Eurodollar futures trimmed the projected end-of-year fed funds rate to 3.48 percent from about 3.57 percent late on Thursday.
The data caught many investors on the wrong side of the market, in cash and futures, where speculators have been setting up recently for a stronger US economy.
Even the good news - the unemployment rate dropped to 5.2 percent from 5.4 percent - turned out to be not so great at closer inspection.
Much of the decline, analysts said, was due to shrinkage in the pool of available workers as discouraged job-seekers just stopped looking.
"It looks like we had a sort of decline in the labour force in January that accounted for some of the decline in the unemployment rate," said Gary Thayer, chief economist A.G. Edwards & Sons.
In other news on the economy, the University of Michigan's final survey of consumer sentiment for January was 95.5, just below the median forecast and down from 97.1 in December. The report's index of current conditions rose, but six-month expectations were lower.
"Because consumer sentiment is highly correlated with changes in payroll employment, faster job creation will be needed to lift sentiment out of its recent doldrums," said Stephen Wood, economist at Insight Economics.
But in light of the all-important payrolls data, sentiment was relatively low on investors' list of concerns.
Also largely ignored was a speech by Fed Chairman Alan Greenspan.
The Fed chief is usually a major market mover, but this time he just repeated his long-standing position on the US trade deficit, so investors took it in stride.
Shorter-dated debt also climbed but more modestly. Two-year notes rose 3/32 to yield 3.30 percent from 3.32 percent. Five-year notes added 12/32 and were yielding 3.68 percent.
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