Treasury debt prices plunged on Friday after a much stronger reading on the labor market suggested the Federal Reserve might not need to cut interest rates later this month.
The economy generated 110,000 new jobs last month and a previously reported August contraction was revised away to show a gain of 89,000, effectively reversing the trend that many believe pushed the central bank over the edge on rates.
Short-dated bonds, which are most sensitive to monetary policy expectations, were the hardest hit. Two-year notes tumbled 7/32 in price for a yield of 4.10 percent, up an impressive 13 basis points from Thursday.
The bond market is down because the economy still looks pretty healthy, said Gary Thayer, chief economist at A.G. Edwards & Sons. Some traders may think that this will keep the Fed on the sidelines, but it doesn't take them out of the picture. Housing is still weak.
Futures markets were now split down the middle regarding the chances of an October rate cut.
Those who believed the Fed would still move pointed to the unemployment rate, which rose to 4.7 percent. This indicated that inflation pressures from the labor market were scant, although a larger-than-expected rise in average hourly earnings would not comfort policy officials.
Still, the bond market has been setting up for a serious deterioration in economic growth. The jobs number, while not spectacular, was hardly recessionary.
Adjusting to this new reality, benchmark 10-year notes dived 19/32 in price for a yield of 4.59 percent, up from 4.52 percent.