Treasury prices rose after a report that employers created far fewer jobs than expected in December stoked recession worries.
The advance allowed the government bond market to complete the first trading week of 2008 with steep gains and pushed the 10-year benchmark yield for a while to a six-week low.
U.S. employers added a scant 18,000 jobs in December, far below the 70,000 projected by analysts surveyed by Thomson/IFR Markets. The unemployment rate jumped up to a two-year high of 5 percent. The sole positive element of the report was a slowing of hourly wage growth, which eases inflation worries a bit.
The report caused stock prices to cave in and sent investors in search of government-backed bonds and other guaranteed assets.
The benchmark 10-year Treasury note advanced 11/32 to close at 103 7/32 with a yield of 3.86 percent, down from 3.89 percent late Thursday. Earlier the yield skidded to 3.83 percent, its lowest level since Nov. 26. Prices and yields move in opposite directions.
The 30-year long bond gained 4/32 to 110 18/32 with a yield of 4.36 percent, down from 4.37 percent late Thursday.
The 2-year note gained 4/32 to 101 31/32 with a 2.75 percent yield, down from 2.82 percent the prior session.
The 3-month yield fell to 3.19 percent from 3.25 percent late Thursday as the discount rate dropped to 3.11 percent from 3.28 percent.
"Today's employment report is a resounding alert that recession may already be here," said Ashraf Laidi, chief foreign exchange analyst at CMC Markets.
Laidi noted that the report also featured a loss of 24,000 retailing jobs during the critical holiday shopping season, suggesting that discounting by retailers cut profit margins and forced layoffs.
Economists were uncertain whether the economy is experiencing a brief pullback or will experience an actual recession, which takes place only when there are two successive quarters of overall contraction.
"We're about to tilt over to the other side of the economic curve and begin the downswing," said Bernard Baumohl, managing director of The Economic Outlook Group. "The only real question now is whether the economy will contract for one or two quarters."
The report, as well as a deteriorating housing market and the continuing impact of the subprime mortgage problem, increases pressure on the Federal Reserve to reduce rates further. The Fed's next monetary policy meeting is Jan. 29-30.
"The Fed may have no other choice but to continue to lower rates to avoid a full-fledged recession," said Kevin Giddis, managing director of fixed income at Morgan Keegan. In late 2007, the central bank began cutting rates for the first time in more than two years to stimulate paralyzed credit markets and a flagging economy.
The Fed on Friday continued its initiative to keep financial markets liquid, saying it will raise the amount of money available to banks at special auctions on Jan. 14 and Jan. 28 to $30 billion. It made $20 billion available in 2007 auctions.