US Treasury debt prices slipped on Friday as moderately strong August jobs data supported expectations of another Federal Reserve interest rate hike later this month.
While the 144,000 increase in August payrolls did little to settle the debate over future prospects for economic growth, it signalled at the very least that the US central bank would continue its monetary tightening campaign.
"It assures that the Fed continues to not buck what was built into the futures contract, and will move by 25 basis points in September," said Peter Kretzmer, senior economist at Banc of America. Reflecting this likelihood, two-year note yields - the most sensitive to rate expectations - jumped to 2.58 percent from 2.46 percent late on Thursday.
A Reuters survey of the top economists on Wall Street taken after the payrolls report found all 22 now expect another tightening at the Fed's September 21 policy meeting.
The benchmark 10-year note shed 17/32 in price, lifting yields to 4.29 percent from 4.22 percent. Earlier this week, yields hit a five-month low around 4.08 percent, having fallen all the way from 4.30 percent in just a few days.
The market found only fleeting support in a sharper-than-expected slowdown in the US services sector. The Institute for Supply Management measure of non-manufacturing business activity dropped to 58.2 in August from 64.8 in July, some way below market forecasts of a dip to 62.8.
The ISM employment measure ticked higher, but was completely overshadowed by the August payrolls figures. The Labour Department's separate household survey showed a decline in the unemployment rate to 5.4 percent from 5.5 percent, but analysts said this was largely due to discouraged workers dropping out of the Labour force.
Some traders had bet that a very weak report could put the Fed on hold and because of that, prices were up before the data were released. The actual numbers dismissed that notion, however, and prices retreated.
"I wouldn't describe it as a strong number, but it does indicate that the economic recovery is still on track," said Anton Pil, global head of fixed income for JPMorgan Private Bank.
"It also gives a green light to the Fed to continue its rate-hiking campaign," he said.
The five-year notes were 15/32 lower in price, taking their yield to 3.49 percent from 3.39 percent.
The 30-year bond fell 24/32, while its yield rose to 5.05 percent from 5.00 percent on Thursday. With short-term debt suffering relatively more, the yield curve flattened.
Combined, the two reports offered a murky view of the economy's future, with some analysts arguing overall growth will pick up in coming quarters and others contending that the expansion is petering out.
Retail and car sales figures earlier this week supported the more pessimistic camp, suggesting consumers - pressured by weakening purchasing power and higher energy costs - are becoming more conservative when it comes to spending.
For bonds, the mixed economic picture would probably translate into another month of range trading, analysts said. Only dramatic shifts in inflation or employment - neither very likely - could lead to a substantial shift in Treasury yields.