reasuries sink as jobs revival keeps rates rising
(Recasts, updates prices)
By Wayne Cole
NEW YORK, May 6 (Reuters) - Treasury debt prices sank on Friday after an unambiguously strong U.S. jobs report scotched talk of an economic soft patch and even revived speculation the Federal Reserve might have to hike rates at a faster pace.
The interest rate-sensitive two-year Treasury note <US2YT=RR> took a hefty 10/32 dive in price. That lifted yields to a one-month high of 3.73 percent from 3.56 percent late Thursday, the biggest one-day rise since a similarly strong jobs release roiled bonds in May last year.
Non-farm payrolls jumped 274,000 in April, easily beating forecasts of 170,000, while employment in the previous two months were revised up by a total 93,000. The jobless rate held steady at 5.2 percent as expected, and both the workweek and wages advanced.
"Today's report should convince most market participants that the March softness in the data was primarily a one-month phenomenon," said Stephen Stanley, chief economist at RBS Greenwich Capital.
He added that just as March economic data were generally weak, April figures should be mostly strong.
"So the bond market will have plenty of threatening data to deal with over the rest of May," Stanley said. "Sounds like a recipe for continued 25 basis-point rate hikes for the foreseeable future. We stand by our call for 4.25 percent fed funds at year-end."
Rates are currently at 3.00 percent, after the Fed hiked by a quarter percentage point on Tuesday.
The futures <0#ED:> market moved quickly to price in the risk of higher borrowing costs going forward. The projected year-end fed funds rate rose to above 3.75 percent on the jobs report from about 3.62 percent late Thursday.
The benchmark 10-year note <US10YT=RR> lost 29/32 in price, while its yield rose to 4.28 percent from 4.16 percent late on Thursday.
The reversal was a sharp one since yields had got as low as 4.14 percent on Thursday after news of credit downgrades for General Motors Corp <GM.N> and Ford Motor Co <F.N> sparked a flight to quality.
The five-year note <US5YT=RR> fell a heavy 22/32, taking yields up to 3.96 from 3.81 percent late on Thursday.
The 30-year bond <US30YT=RR> dropped 1-5/32, lifting yields to 4.65 percent from 4.58 percent. The bond had already taken a tumble this week after Treasury said it might start reissuing the maturity having abandoned it back in October, 2001.
The prospect of fresh supply at the long-end had forced many investors to abandon bets the yield curve would continue flatten. However, the strength of the jobs data changed all that as short-term yields were yanked higher to reflect the greater risk of more Fed rate hikes.
As a consequence the yield curve swung flatter once more, with the gap between two- and 10-year yields narrowing six basis points on the day to 54 basis points after hitting highs above 61 basis points just a couple of days ago.
One of the more startling parts of the payrolls report was a massive 0.9 percent gain in aggregate hours worked, the biggest monthly rise since February 1997.
"In yet another sign of real strength, the average weekly hours figure rose from 33.7 hours to 33.9 hours. This increase is the output equivalent of adding another 700,000 jobs to the economy," said Drew Matus, senior financial economist at Lehman Brothers.
This in turn meant second quarter economic growth likely got off to a much stronger start than analysts first feared.
"What soft patch?" wondered Matus. "A very strong, well-balanced, employment report should alleviate fears of slowdown and keep the Fed firmly in play for the next few meetings."
ciao ric 
