A U.S. bond rally pushed benchmark 10-year yields back below 3 percent on Friday after government data showing subdued U.S. job growth left traders wondering whether the Federal Reserve would trim its bond purchases as promptly as some had thought.
Further improvement in the labor market is seen as pivotal to the Fed's decision to reduce its $85 billion a month in Treasury and mortgage-backed securities purchases, known as quantitative easing, or QE.
The poor payrolls reading prompted traders to exit bearish bond bets after Thursday's global bond rout lifted U.S. yields to their highest in at least 25 months. But traders and analysts said market rallies fueled by short-covering tend to be brief.
The Labor Department reported that U.S. payrolls grew by 169,000 jobs in August, short of the 180,000 forecast by economists polled by Reuters.
But downward revisions to job numbers originally reported for June and July were even more troubling to economists.
The U.S. jobless rate, meanwhile, slipped to 7.3 percent, the lowest since December 2008, but the decline occurred because more people had given up the search for work.
The sharp downward revisions to the previous months' job growth and the lower workforce participation caused people to question the timing of cutbacks in the Fed's bond purchases.
"Perhaps the economy is not as strong as it seemed a few months ago," said Daniel Heckman, senior fixed income strategist at U.S. Bank Wealth Management in Kansas City, Missouri. "That adds to the indecision about whether the Fed will taper in September or decide to do it in December."
Benchmark 10-year Treasury notes rose 16/32 in price, after surging more than a point moments after the payroll data. Their yields fell to as low as 2.864 percent before retracing back to 2.936 percent. The 10-year yield had touched 3.007 percent overnight, its highest since July 2011.
The two-year yield, the most sensitive to changes in perception on the Fed's rate policy, was 0.466 percent, down from 0.526 percent at Thursday's close. It had traded above 0.50 percent for the first time since June 2011 on Thursday.
Short-term U.S. interest-rate contracts implied traders pushed bets on the Fed's first rate hike a bit later into 2014.
Kansas City Fed President Esther George, a consistent monetary policy hawk who has argued for fewer Fed bond purchases all year, said on Friday the U.S. central bank should begin cutting its monthly bond purchases to around $70 billion a month at its mid-September policy meeting.
A Reuters poll conducted after Friday's release of U.S. employment data showed 13 of 18 primary government securities dealers expect the Fed to announce a cut in the size of its bond purchases - meant to stimulate the economy - at its Sept. 17-18 policy gathering.