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Treasury yields rise as surge in oil prices boost inflation outlook; jobs report misses expectations

U.S. government debt yields inched higher Friday after crude oil prices jumped nearly 5 percent, easing fears of falling inflation that have contributed to flattening of the so-called yield curve.

As of the latest reading, the yield on the benchmark 10-year Treasury note rose 3 basis points to 2.903 percent while the 30-year bond yield climbed to 3.182 percent.

A recent fall in oil prices has contributed to market anxieties that the Federal Reserve's inflation expectations may have been too high and that continued increases to the federal funds rate would be too much for debt-laden corporations to digest.

However, recent developments at an OPEC meeting in Vienna, Austria appear to have boost prices as the alliance plans to cut production by at least 800,000 barrel per day. The price of Brent crude, the international benchmark for oil prices, rose $2.92, or 4.86 percent to $62.90 a barrel by 9:04 a.m. ET. U.S. West Texas Intermediate crude futures were up $2.20, or 4.2 percent at $53.66 a barrel.

"This crude glut will ease up," said Nathan Sheets, chief economist at PGIM Fixed Income. "President Trump massive wrong-footed the oil market. People were expecting the limits on Iran exports of oil to be very binding, but he provided a lot of exemptions while the Saudis significantly increased supply to the market."

"The market was way oversupplied," he added. "My expectation remains that those exemptions will tighten up some and I think over the next year Saudi oil is likely to tighten some."

U.S. Markets Overview: Treasurys chart

In economic news, nonfarm payrolls increased by 155,000 last month, missing economist expectations of 198,000; the closely-followed unemployment rate was unchanged at 3.7 percent, its lowest level since 1969. The Labor Department also said that average hourly earnings rose less than expected to $27.35, a month-over-month increase of 0.22 percent.

The average work week edged lower by 0.1 hours to 34.4 hours.

"Basically we got a ho-hum labor market report, lukewarm. It doesn't bolster the argument that the economy is strong; it's just right down the middle," Sheets added. "It gives those that are hoping the Fed is shifting to a more dovish stance a little bit more evidence to point to in that discussion."

Jitters in stock markets in the past few weeks have also weighed on traders, leading to increased buying in typically safe haven assets like government bonds and gold. However, recently, the bond market has been under particular scrutiny as the spread between the 2-year and 10-year yields has narrowed recently. This phenomenon, described as flattening of the yield curve, is often interpreted as a warning signal of an upcoming financial crisis.

Elsewhere, a report on the Wall Street Journal suggested on Thursday that the Federal Reserve is considering whether to signal a wait-and-see approach at its upcoming meeting. Investors are anticipating the Federal Reserve's meeting on Dec. 18.-19.

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