A Thursday report based on payrolls showed the U.S. private sector added more jobs than forecast in December, a bullish sign that added to the hope of a strong official Labor Department report on Friday.

Yields on 10-year notes declined 2 basis points to 1.96 percent, after touching 2.03 percent following the data's disclosure.

The New Jersey-based ADP Employer Services reported an increase of 325,000 jobs in December, the highest in records going back to 2011 and beat the Bloomberg consensus estimate of 178,000 by a wide margin.

Employment in the service-providing sector rose 273,000 in December, which is up from an increase of 176,000 in November. Employment in the goods-producing sector increased 52,000 in December, while manufacturing employment increased 22,000. The financial services sector saw a decline of 1,000.

Small businesses -- those with less than 50 workers -- created 148,000 jobs, which made them bigger contributors to the country's labor market than larger businesses.

Take it with a Grain of Salt

Thursday's ADP result is very compelling, if it does not miss as big as it did last December.

As a preliminary gauge of private payrolls, ADP has a mixed track record compared to the official Labor Department numbers released on the first Friday of each month, especially in December.

In December 2010, ADP initially estimated private sector added 297,000 jobs, but the Labor Department later said only 113,000 jobs were created. Even after revisions, the ADP estimate was still 79,000 higher than the official number. However, in December 2009, the difference between these two reports was only 3,000.

The reason for this awry is that some employers have an incentive to keep everybody on the payroll list for tax purposes through the year, even if they are no longer being paid, Capital Economics told The Street.

Firms then purge their payrolls at the end of the year, which creates a very strong seasonal effect. The official payroll figures are not affected because that survey only counts somebody as employed if they were paid in that particular month, so these phantom workers would have fallen off the official count earlier in the year, Capital Economics explained.

What to Expect on Friday

The consensus for Friday's government report is for private sector job growth to accelerate to 170,000 with the public sector again expected to drop 20,000 employees thus bringing the total to 150,000.

The unemployment rate, which is included in the same report as the job creation numbers, dropped sharply in November to 8.6 percent from 9 percent. However, that number is partly a result of a lower labor participation rate. Economists are looking for the December unemployment rate to tick up to 8.7 percent.

Released one day ahead of the official report, Gallup finds U.S. unemployment holding at 8.5 percent in December, while underemployment remained virtually flat at 18.2 percent, with 9.7 percent working part time but seeking full-time jobs.