US Treasury yields edged lower on Friday in Europe with investors mainly sitting on the sidelines as they await non-farm payrolls data for fresh clues on the health of the world's biggest economy. The report at 1230 GMT is expected to show the US economy shed 60,000 jobs in March after a loss of 63,000 jobs in February.
Forecasts ranged from a loss of 150,000 jobs to a gain of 65,000 jobs, a Reuters poll showed. The jobless rate was seen rising to 5.0 from 4.8 percent. "All eyes are on the payrolls data. This one is even more important given the improvement in risk appetite we've seen," said Nick Stamenkovic, bond strategist at RIA Capital Markets.
"I expect quite a sharp fall in payrolls to provide a reality check for more bullish growth investors out there, consequently we should see a bit of support for the front-end coming through."
Indicators used to gauge the outcome of the payrolls data have been mixed with the number of people claiming unemployment benefits last week soaring to the highest level since 2005, in contrast to a separate report showing the US private sector unexpectedly added jobs in March.
The two-year notes yielded 1.920 percent, little changed on the day, but down from a one-month high of 1.951 percent reached earlier this week. The benchmark 10-year note yield nudged down 2 basis points on the day to 3.609 percent, also off this week's three-week peak of 3.617 percent set a day earlier.
Ten-year Treasury futures inched up 4/32 to 117-35/64. Bond yields have risen this week with the short-end gaining more than their longer-dated counterparts after comments from Federal Reserve Chairman Ben Bernanke were interpreted by the market as suggesting the end of the easing cycle was nearing.
Bernanke said on Thursday the full benefit of the Fed's series of rate cuts had not yet been felt, given the lag between the Fed's actions and their impact on the economy that may reduce the need for many more rate cuts ahead.
That saw the 2/10-year yield curve flatten to around 167 basis points, well off this week's high near 180 basis points and last month's peak above 210 basis points - a near four-year high.
Fed funds rates futures are now discounting just a quarter percentage point cut to the 2.25 percent Fed funds rate at the Fed's next policy meeting late this month, and are pricing in only a slim chance the Fed will cut rates by 50 basis points.
Since September the Fed has slashed rates six times by a total of 3 percentage points to 2.25 percent. "A very weak (non-farm payrolls) figure may instil doubts about the moderate confidence expressed by Bernanke and favour the short-end of the Treasury curve," said ABN Amro strategist Alessandro Mercuri.
"Futures and options markets are currently assigning a very high risk-neutral probability to a 25 bp cut at the next FOMC, on April 30th, while most economists foresee a 50 bp cut, so there may be room for a rally at the short-end."
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