US Treasury debt prices soared on Friday after the latest employment figures suggested US job creation continues to lag, soothing worries the Federal Reserve might raise interest rates more aggressively. US non-farm payrolls rose just 112,000 in November after a downwardly revised 303,000 gain in October. Analysts had predicted gains closer to 180,000, but many in the market had been betting on a much stronger result.
"People were building in higher and higher expectations going into this number - the 'whisper number' was somewhere around 250,000," said Andrew Brenner, head of fixed income at Investec US.
That camp turned out to be painfully wrong as the benchmark 10-year note surged a whopping 1-4/32 to yield 4.27 percent, down sharply from 4.37 percent on Thursday. Yields dipped as low as 4.24 percent at the height of the rally.
While most analysts still think the Fed will raise interest rates at its next meeting on December 14, many have begun to think officials might think twice about tightening further if the weak hiring trend persists.
The futures market seemed to agree, with fed funds showing a better than 90 percent chance of a quarter-percentage-point hike to 2.25 percent this month, while shaving the chance of increases in February and March.
Bears pointed to the household survey, which showed the unemployment rate ticked down to 5.4 percent from 5.5 percent. But even there, weekly earnings and the workweek were both softer than expected.
Investors were so obsessed with jobs that they barely blinked after the Institute for Supply Management reported a solid increase in its gauge of the services sector.
ISM's non-manufacturing index climbed to 61.3 in November from 59.8 in October, but the survey's components showed signs of weakness in both hiring and new orders.
"This is one of the days when nobody is really going to care because the employment report was definitely weak," said Cary Leahey, senior US economist at Deutsche Bank.
If anything, the market rallied further after the ISM report, with the two-year note jumping 7/32 for a yield of 2.91 percent, compared with 3.05 percent on Thursday.
Five-year notes were swept 21/32 higher to a yield of 3.57 percent while the 30-year bond surged 2-1/32 to yield 4.93 percent from 5.07 percent.
Traders said investors in mortgage debt were also buying the market to hedge against the risk of mortgage prepayments as rates move lower.
Despite the jobs disappointment, Fed officials remained doggedly optimistic, with regional central bank presidents from Boston to Philadelphia sounding the usual upbeat chorus.
Traders also reported sizable Asian buying of Treasuries overnight and the latest figures from the Fed showed foreign central banks were still gobbling up US government debt, albeit at a slower pace than early in the year.
The market has become increasingly worried that the slide in the dollar would encourage offshore central banks to diversify away from dollars rather than intervening to support the currency, leaving less money to be invested in treasuries.