Treasurys Hit Hard by Payroll Growth

The sense that the labor market is holding up lowered demand for Treasurys, a secure asset that generally performs well when investors are concerned about economic softness. Stocks fluctuated between losses and gains after the news.

The Labor Department said 94,000 jobs were added to the nation's payrolls in November and the unemployment rate held steady at 4.7 percent. October payroll growth was revised upward by 4,000 to 170,000.

Wages in November rose by 0.5 percent, but many economists expected a gain of just 0.3 percent. The Federal Reserve is known to carefully monitor wage inflation in its policy decisions. If wages continue to rise at the pace seen last month the Fed will be under more pressure to keep rates higher.

The Thomson/IFR Median estimate was for jobs growth of 100,000. Creation of 100,000 jobs per month was viewed by many economists as the lowest acceptable growth rate prior to the severe problems seen in the housing and credit markets in the second half of this year.

"This report is not good, but it is close to what was expected and in this environment, people will take it," said Joe Balestrino, fixed-income market strategist at Federated Investors Inc. "This is better than the report being well below expectations."

The benchmark 10-year Treasury note dropped 1 25/32 to 101 4/32, with a yield of 4.11 percent, up from 4.02 percent late Thursday. Prices and yields move in opposite directions.

The 30-year long bond lost 1 23/16 to 106 27/32, with a yield of 4.58 percent, up from 4.50 late Thursday.

The 2-year note fell 6/32 to 100, with a yield of 3.12 percent, up from 3.04 percent.

The yield on the 3-month note inched up to 3.10 percent from 3.09 percent late Thursday, as the discount rate advanced to 3.03 percent from 3.02 percent.

The fact that jobs creation was not more boisterous also will give the Fed the maneuvering room it needs if it wishes to cut interest rates at its Tuesday monetary policy meeting, he said.

The Fed this fall reduced the federal funds target by 0.75 percentage point to 4.50 percent. Pricing in the Fed funds futures market showed that investors overall expect the Fed to lower rate another 0.25 percentage point on Tuesday, given that credit markets are behaving warily ahead of the year-end and the housing market shows no sign of improvement. Some investors are betting on a 0.50 percentage point cut.

Another report also backed the view that the economy has multiple challenges, but is not in collapse.

The University of Michigan's preliminary consumer sentiment for this month dropped to 74.5 from 76.1 in November. Thomson/IFR had forecast a 76.0. The latest result reflected consumer concerns about higher gas prices and weakness in the credit market.