A downbeat jobs report boosted shorter-dated U.S. government debt prices on Friday, paring back traders' expectations of faster U.S. economic growth in reaction to a recent string of upbeat data.
A resilient stock market, uncertainty over the fiscal crisis in Europe and uneasiness over next week's $66 billion of coupon-bearing supply produced another volatile session for bonds in moderately heavy volume, analysts said.
November's surprisingly weak U.S. job growth and a rise in the jobless rate rekindled the view that the Federal Reserve will keep short-term interest rates near zero into 2012 and will complete its $600 billion bond purchase program, dubbed QE2.
I tend to think the jobs report was a reality check. It dampened the optimism from the recent wave of economic data, said Sharon Stark, chief fixed-income strategist at Sterne Agee in Birmingham, Alabama.
This view, however, hurt long-dated Treasuries, as some traders perceived a protracted period of ultra-loose monetary policy could spark inflation once the economy accelerates.
The long end is underperforming with inflation concerns and the Fed printing money, said Larry Milstein, head of government and agency trading at R.W. Pressprich in New York.
The benchmark 10-year note fell 6/32 in price, yielding 3.02 percent, up from 2.99 percent late Thursday. The 10-year yield ended near 3.00 percent for a third straight day, a technical signal that it may rise further and probe support in the 3.10 percent in the coming days.
The 30-year bond finished 1 point lower for a 4.32 percent yield, up from 4.26 percent late Thursday. The longest U.S. government debt fell for a third straight day, with its yield spiking near 21 basis points -- the biggest three-day jump in three months.
Five-year Treasuries were the day's best-performing maturity, rebounding from a beating the previous two sessions. They last traded up 8/32 in price for a yield of 1.62 percent, down 5 basis points from late Thursday.
Whenever the belly outperforms, interest rate hikes are priced out of the front end of the curve and they typically go into the back end of the curve, said Igor Cashyn, interest rate strategist at Morgan Stanley in New York.
The long-dated sell-off steepened the two-to-30-year part of the yield curve. The yield gap between two-year and 30-year Treasuries grew to 3.83 percentage points from 3.71 points late Thursday and several basis points from its record wide near 3.88 points set on November 15.
Prospects of weak demand for next week's 30-year supply, which is seen as the riskiest during this period of super-easy Fed policy, also hammered the long end of the curve.
The Treasury will sell $32 billion in new three-year notes on Tuesday; $21 billion of a prior 10-year issue on Wednesday and $13 billion of an older 30-year bond on Thursday. (Additional reporting by Karen Brettell; Editing by James Dalgleish)