U.S. Treasury debt prices plunged Friday, after a much stronger reading of the labor market suggested the Federal Reserve may not need to cut interest rates later this month.
The economy generated 110,000 new jobs last month and a previously reported August contraction was revised to show a gain of 89,000, effectively reversing the trend that many believe pushed the central bank to cut rates in September.
Short-dated notes, which are most sensitive to monetary policy expectations, were hard hit. Two-year notes tumbled 6/32 in price, their biggest sell-off in about two weeks, for a yield of 4.09 percent, up 11 basis points from Thursday.
"The bond market is down because the economy still looks pretty healthy," said Gary Thayer, chief economist at A.G. Edwards.
In contrast, U.S. stocks rallied, with the Standard & Poor's 500 Index climbing to a record high and the Nasdaq Composite Index up 1.5 percent after the healthy employment report soothed investors' worries about the outlook for economic growth and corporate profits.
The rally in stocks further contributed to the slide in Treasury bond prices.
The dollar, however, retreated on the perception that the jobs data did not indicate the U.S. economy had shifted from a slower path and was unlikely to prevent the Federal Reserve from cutting interest rates. The U.S. Dollar Index was down 0.3 percent at 78.237.
Rate futures markets were now split down the middle regarding the perceived chances of an October rate cut.
"Treasuries had discounted a lot of negative news already. This kind of report is one that creates a profit-taking mode," said Kevin Flanagan, fixed-income strategist for global wealth management with Morgan Stanley in Purchase, New York.
"The report doesn't take the Fed out of the box in general, but leads you to believe there is no urgency for them to cut rates at the end of the month," Flanagan said.
Those who believed the Fed would still cut borrowing costs on Oct. 31 at the end of its next regular policy setting meeting, pointed to the unemployment rate, which rose to 4.7 percent. This indicated that inflation pressures from the labor market were scant, although a larger-than-expected rise in average hourly earnings would not comfort policy officials.
Still, the bond market has been setting up for a serious deterioration in economic growth. The jobs number, while not spectacular, was hardly recessionary.
Adjusting to this new reality, the benchmark 10-year note tumbled more than a full point in price while its yield jumped to 4.65 percent from 4.52 percent late on Thursday.
The 30-year bond fell two full points, pushing its yield up to 4.88 percent from 4.76 percent late on Thursday.
The 10-year U.S. interest rate swap spread widened to 63.25 basis points from 62.25 basis points Thursday.
U.S. bond markets will observe a recommended close Monday for the Columbus Day public holiday.