U.S. Treasuries rose Friday, sending short-dated yields to three-year lows as grim jobs data prompted investors to increase bets on Federal Reserve interest rate cuts.
U.S. employers added a scant 18,000 jobs in December and the national unemployment rate jumped the most since 2001, rising to 5.0 percent from 4.7 percent.
The news confirmed fears that fallout from a housing slump and credit crunch was spreading throughout the economy, making safe-haven government bonds a more appealing bet for uncertain investors.
Bond prices briefly trimmed their gains after a survey showed service sector growth fell less than expected in December, but investors remained focused on the weak jobs report.
"The Treasury market has plenty of room to run," said Carl Lantz, U.S. interest rate strategist at Credit Suisse in New York.
"There is not a lot to feel good about in that jobs report and the uptick in the unemployment rate was particularly worrying. The Fed historically eases when unemployment starts to rise."
Benchmark 10-year notes rose 15/32 in price to yield 3.84 percent. Two-year notes gained 6/32 to yield 2.71 percent. The price gains pushed two-year yields down as far as 2.65 percent, their lowest since late 2004.
"The bond market rallied because the unemployment rate moved up in a shocking way, and that's sort of political dynamite that may make the Fed more prone to easing than otherwise," said Pierre Ellis, senior economist at Decision Economics in New York.