U.S. Treasurys yields fell from two-year highs on Friday after weaker-than-expected U.S. job growth in July added to uncertainty over the timing of when the Federal Reserve is likely to pare back its bond purchase program.
Employers added 162,000 jobs in July, fewer than economists had expected. Most economists and traders have been expecting that the Fed will start reducing its $85 billion-a-month bond purchases in September as the economy gains momentum. Friday's data pushed back some of those expectations.
(Read more: So-so summer: Job growth disappoints)
"The question of tapering is back up in the air again given the labor market numbers were mediocre at best," said Rick Klingman, managing director in U.S. Treasurys trading at Societe Generale in New York. Benchmark 10-year Treasury yields fell to 2.61 percent, down from near two-year highs of 2.75 percent before the data.
Traders of short-term U.S. interest-rate futures also boosted bets that the Fed will wait until 2015 before raising short-term borrowing costs. The contracts, tied to the Fed's policy rate target, rise in price when traders see a bigger chance of a later Fed rate hike. The jobs disappointment is likely to bring even more scrutiny to data heading into next month's payrolls report, which will be the last one before the Fed's September meeting.
"The data from here until the September FOMC meeting will be very important as we are roughly 50/50 whether or not tapering begins in September," said Eric Stein, co-director of global income at Eaton Vance Investment Managers in Boston. New supply scheduled for next week was seen capping Friday's price gains.
The Treasury will sell $72 billion in new three-, 10- and 30-year bonds next week. Short-covering by traders who had bet on a strong number, however, added to Friday's bid.
July's jobs gains surprised many traders who had been expecting as many as 200,000 to 250,000 jobs may have been added during the month. Some had set up short positions in anticipation that a strong number would push yields higher.
Weekly Federal Reserve data on dealer positions showed dealers short by about 14,000 contracts in the six-to-seven-year range and short about 6,700 contracts in the seven-to-10-year maturity range as of July 24.
After Friday's move, Treasurys are seen as likely to stay in their recent range until new data paints a clearer economic picture. The tapering debate will remain at center stage as the bond market goes "sideways" from here, said Kevin Giddis, senior managing director and head of fixed income at Raymond James. "Investors will play it pretty close to the vest until some real action occurs."
Separately, the CME Group said it paused trading in some Treasurys futures for five seconds on Friday before the jobs report. CME spokesman Michael Shore said the firm had "stop logic events" in the 10- and 30-year Treasurys futures contracts at 8:29:57 a.m., three seconds before the employment report was released.
About 173,000 10-year Treasury contracts traded in the minute before the jobs report came out, with several large trades in the seconds before the halts. The CME's halts generally occur after a number of trades come in that would cause the contract in question to trade outside a certain defined range.