Bond prices tumble on rosy US jobs report

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U.S. Treasurys dropped sharply on Friday after U.S. employers hired more workers in November than during any month in nearly three years, boosting expectations for the Federal Reserve to raise interest rates by mid-2015.

The robust report caused the yield on U.S. 2-year Treasuries to rise nearly 9 basis points to its highest since May 2011, according to Reuters data.

"This supports the view that the Federal Reserve will start hiking rates in the middle of next year," said Mohamed El-Erian, chief economic advisor at Allianz in Newport Beach, California.

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The jobs figures caused a sharp selloff in short-dated U.S. Treasuries, and traders shifted bets on Federal Reserve's first round of interest-rate increases to July 2015, compared with September 2015 before the report.

That puts traders in line with the November Reuters poll of primary dealers, the majority of whom see the first interest-rate increase in June.

The yield curve also flattened, with the differential between the five-year note and the 30-year bond falling to its lowest since January 2009. Shorter-end trading, especially in three-year and five-year Treasuries, has been dominated by low inflation expectations and the slide in world oil prices, according to Jim Vogel, interest rate strategist at FTN Financial in Memphis, Tennessee.

"Today's big number makes people go, 'Oh, the Fed's out there'," Vogel said. "So there's this big move up in real interest rates in threes and fives."

Three-year notes were down 11/32 and five-year maturities fell 15/32.

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The U.S.10-year benchmark Treasury was off 20/32 and yielding 2.31 percent. Yields on the 30-year Treasury bond briefly topped 3 percent and were last at 2.97 percent, reflecting a price decline of 21/32. Bond prices fall when yields rise.

Nonfarm payrolls surged by 321,000 last month, the most since January 2012, the Labor Department said on Friday. The unemployment rate held steady at a six-year low of 5.8 percent.

In addition, data for September and October were revised to show 44,000 more jobs created than previously reported.

"It is unequivocally bullish on the U.S. economy," said Anthony Valeri, fixed-income strategist at LPL Financial in San Diego. "We'll need more evidence but it definitely contradicts the low yield environment we have been in."