U.S. Treasury prices edged up on Monday, extending Friday's rally after employers added far fewer jobs in December than traders and economists had expected, with yields falling to three-week lows.
Benchmark 10-year note yields registered their largest one-day fall since October on Friday on news U.S. employers added only 74,000 workers in December, far short of the 196,000 rise forecast by analysts polled by Reuters.
The Merrill Lynch MOVE index, which estimates future volatility of long-term bond yields, plunged on Friday to its lowest level in two months after the jobs data. The index dropped to 61.2 Friday, down from 73.7 the previous day.
Three- and five-year notes, which have been the worst performers since the Federal Reserve said in December it would reduce the size of its bond purchase program, were among the best bid after Friday's weak jobs data.
The lower-than-expected jobs gain is not yet seen as likely to alter the Fed from its course of reducing bond purchases, which were cut in December by $10 billion to $75 billion-a-month and are seen as likely to be further pared over coming months.
But speculation over when the Fed is likely to begin raising rates from rock-bottom levels is likely to keep short- and intermediate-dated debt volatile, with expectations over when a rate hike could begin varying from mid-2015 to 2016.
"I think that's really where the volatility is going to be as far as those forward rate expectations are. We had some liquidation since the Fed meeting in the front-end of the market and I think some of that is slowly creeping back in as people realize the Fed's nowhere near removing that type of accommodation,'' said Tom Tucci, head of Treasuries trading at CIBC in New York.
Five-year notes were last up 5/32 in price to yield 1.589 percent, down from a high of 1.755 percent on Friday before the jobs data.
Benchmark 10-year notes rose 8/32 in price to yield 2.831 percent, down from a high of 2.967 percent on Friday.
The economic calendar was light on Monday with the next major release being retail sales data for December on Tuesday, which may have been negatively impacted by weather.