TREASURIES-Weak U.S. jobs data sparks U.S. bond rally
* U.S. December payroll growth slowest in 3 years
* Medium-to-long dated yields fall to lowest in 3 weeks
* Bond market rise tempered by jobless rate drop
* Fed buys $3.3 bln medium-dated Treasuries due in 2020
NEW YORK, Jan 10 (Reuters) - U.S. Treasuries prices jumped on Friday with benchmark yields falling to their lowest in about three weeks, as government data showed the weakest monthly job growth in three years in December, raising some doubts about the economic recovery.
The surprise setback in labor conditions did not alter expectations the Federal Reserve will wind down its third round of bond-purchase stimulus at the end of the year but the weak set of jobs figures raised bets the central bank would be in no hurry to raise short-term interest rate, traders said.
"We are seeing a solid rally across maturities because the weak payroll print," said Jake Lowery, portfolio manager at ING U.S. Investment Management in Atlanta. "But one month of weak data is not enough to throw the Fed off its measured pace of tapering."
The bond market jumped on the news that U.S. employers added only 74,000 workers in December, far short of the 196,000 increase forecast by analysts polled by Reuters.
Including the tepid December figure, the economy still created about 2.2 million jobs in 2013.
The market rise was mitigated by a surprise drop in the unemployment rate to 6.7 percent, which was the lowest since October 2008, although the drop stemmed partly from people leaving the workforce. The latest payrolls report also showed more than a quarter million workers stayed home due to rough winter weather across much of the country last month.
"You had an initial short-covering rally in the bond market," said Larry Milstein, head of government and agencies trading at R.W. Pressprich & Co. in New York. "Then a lot of it (the December payrolls report) is being written off due to inclement weather."
Next week's economic data might also be skewed by recent inclement weather, clouding the picture of whether U.S. growth was indeed strengthening at year-end.
"Let's see how the weather distortion (influenced) the rest of the December data, especially retail sales," Lowery said.
The Commerce Department will release its December retail sales report at 8:30 a.m. EST (1330 GMT) on Jan. 14. Economists polled by Reuters forecast a mild 0.2 percent increase last month after a 0.7 percent rise in November.
JOBS DATA COOLS RATE-HIKE WORRIES
Benchmark 10-year Treasury notes last traded 21/32 higher in price with a yield of 2.886 percent, down 8 basis points from late on Thursday. The 10-year yield touched a session low of 2.871 percent after hitting a near 2-1/2-year high of 3.041 percent last week.
Medium-term Treasuries fared the best among all maturities, rebounding from recent weakness on fears the Fed might speed up its pace of cutting bond purchases and perhaps raising short-term interest rates before late 2015, when most Wall Street economists forecast the Fed's first rate hike to occur.
The five-year notes last traded up 14/32 in price with a yield of 1.648 percent, down 10 basis points from late on Thursday. The five-year yield hit 1.632 percent earlier, the lowest level since Dec. 19, according to Reuters data.
Short-term U.S. interest rates futures jumped as traders scaled back their expectations of a Fed rate hike in the first half of 2015. They implied traders now assign a 51 percent chance of a rate hike at the Fed's April 2015 meeting, less than a 62 percent on Thursday before the latest jobs report, according to CME FedWatch, which compiles rate expectations based on its federal funds futures contracts.
Meanwhile, the Fed bought $3.30 billion in Treasuries due in 2020, completing this week's purchases of government debt for its third round of quantitative easing (QE3).
On Dec. 18, Fed policymakers decided to reduce the central bank's monthly QE3 purchases of Treasuries and mortgage-backed securities by $10 billion to $75 billion in January.