TREASURIES-U.S. bonds rally on weaker-than-forecast job growth
* U.S. payrolls report weaker than forecast
* Traders add to bets Fed won't raise rates until early 2015
* Treasuries' three-month decline steepest in nearly a decade
NEW YORK, Aug 2 (Reuters) - U.S. Treasuries prices climbed on Friday after weaker-than-expected U.S. job growth in July added another element of uncertainty as to when the Federal Reserve would scale back the monetary stimulus it has used to try to foster economic growth. Bond traders covered short positions and the 30-year Treasury bond briefly extended its gain to a full point. Strategists said supply in the form of a $72 billion Treasury refunding next week restrained the rally. The Treasury will sell three-, 10- and 30-year coupons next week. The benchmark 10-year Treasury note rose 23/32. Its yield eased to 2.63 percent from 2.71 percent on Thursday. Traders said short-covering contributed to the move 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. Traders of short-term U.S. interest-rate futures 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 "modest slowdown" in July job growth "will keep alive the debate about the immediate timing of 'tapering,"' said Decision Economics senior economist Pierre Ellis. The U.S. Labor Department said U.S. employers slowed their pace of hiring in July to 162,000. That was below Reuters consensus estimate of 184,000. But the jobless rate fell anyway, to 7.4 percent, the lowest in over four years. The market rallied on the view that the mixed signals could make the U.S. central bank more cautious about drawing down its huge economic stimulus program. But Credit Suisse economist Jay Feldman said the employment report did not necessarily change the probability of a September reduction in Fed bond purchases. However, he and others said the fuzzy signal sent by the payrolls data on that issue put "a greater premium" on the next round of numbers. "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, with it very much being a data- dependent call," said Eric Stein, co-director of global income at Eaton Vance Investment Managers in Boston.
LOSING STREAK Treasuries posted a loss for a third month in a row in July, falling 0.11 percent, according to a total return index compiled suffered in May and June. Still, the Barclays Treasuries index fell 2.9 percent during the three-month span, the most since April-June 2004. The broader U.S. bond market fared better, earning a 0.14 percent return in July, according to Barclays' Aggregate bond index. It was still down 2.31 percent so far this year.