TREASURIES OUTLOOK-U.S. bonds rally on weak U.S. jobs data
* Benchmark yields book biggest one-day drop in over two months
* U.S. December payrolls growth slowest in three years
* Bond market rise tempered by jobless rate drop, weather skew
* Fed's Bullard, Lacker see bond-purchase tapering to continue
NEW YORK, Jan 10 (Reuters) - U.S. Treasuries prices jumped on Friday, with benchmark yields posting their biggest one-day drop since October, as government data showed the weakest monthly job growth in three years in December, undermining investors' confidence in the economy.
The surprising setback in labor conditions did not alter expectations that the Federal Reserve would wind down its third round of bond-buying stimulus by the end of the year. But the weak hiring figures raised bets that the U.S. central bank would be in no hurry to raise short-term interest rates, traders said.
"We are seeing a solid rally across maturities because of the weak payroll print," said Jake Lowery, portfolio manager at ING U.S. Investment Management in Atlanta, which oversees $190 billion in assets. "But one month of weak data is not enough to throw the Fed off its measured pace of tapering."
The bond market rallied on the news that U.S. employers added only 74,000 workers in December - far short of the 196,000 rise forecast by analysts polled by Reuters.
Including the tepid December figure, the economy still created about 2.2 million jobs in 2013.
"It gets you to pause a bit," said Russ Koesterich, global chief investment strategist at BlackRock in San Francisco, which manages $4.1 trillion. "This fits into the patterns we have seen in the past. This is a 'job-lite' recovery."
The market's rise was mitigated by a surprising drop in the U.S. 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.
James Bullard, the president of the Federal Reserve Bank of St. Louis, said on Friday in the wake of the poor December payroll reading that he still expects the Fed to further reduce its bond purchases. Richmond Fed chief Jeffrey Lacker said another $10 billion monthly cut would likely be considered at the Fed's Jan. 28-29 policy meeting.
On Dec. 18, Fed policymakers decided to reduce monthly purchases of Treasuries and mortgage-backed securities by $10 billion to $75 billion starting in January.
Earlier Friday, 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 to keep interest rates low and stimulate the economy.
In other Fed news, President Barack Obama nominated former Bank of Israel Governor Stanley Fischer as vice chairman of the Fed. If approved, he would succeed Janet Yellen, who will step into the Fed's top post in February.
JOBS DATA COOLS RATE-HIKE WORRIES
Benchmark 10-year Treasury notes last traded 29/32 higher in price with a yield of 2.865 percent, down 10 basis points from late on Thursday. The 10-year note's yield fell to a session low of 2.8579 percent, the lowest in over three weeks after hitting a near 2-1/2-year high of 3.041 percent last week.
"Some investors see value with the 10-year yield at 3 percent," BlackRock's Koesterich said.
The 30-year bond jumped more than 1 point, ending with a yield of 3.799 percent, down 7 basis points for the day.
Medium-term Treasuries fared the best among all maturities, rebounding from recent weakness on fears that the Fed might speed up its pace of cutting bond purchases and perhaps raising short-term rates before late 2015, when most Wall Street economists forecast the Fed's first rate hike will occur.
Five-year notes last traded up 17/32 in price with a yield of 1.633 percent, down 11 basis points from late on Thursday. The five-year note's yield was on track for its biggest one-day decline in nearly four months, 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 the 62 percent seen on Thursday before the jobs report, according to CME FedWatch, which compiles rate expectations based on its federal funds futures contracts.
(Editing by Chizu Nomiyama, W Simon, Bernadette Baum, James Dalgleish and Jan Paschal)