U.S. Treasury yields fell on Friday after data showed that employers unexpectedly shed 23,000 jobs in July, prompting traders to cut odds of a Federal Reserve interest-rate hike in September.
They pared their earlier drop, however, ahead of long-dated supply and consumer price inflation for July due next week.
Economists polled by Reuters had expected employers to have added 80,000 jobs last month. The unemployment rate eased to 4.1% as labor participation fell, defying expectations for the rate to remain steady at 4.2%. Average hourly earnings rose 3.2% on the year, below consensus for a 3.5% increase.
"If you look at all the data components, wages, (nonfarm payrolls), this is a very weak labor market that's all of a sudden happened," said Tom di Galoma, managing director of global rates trading at Mischler Financial Group. "It takes the Fed off the hiking table."
The 2-year note yield, which typically moves in step with Fed interest-rate expectations, fell 4.35 basis points to 4.202% and reached 4.1536%, the lowest since July 17.
The yield on benchmark U.S. 10-year notes fell 1.44 basis points to 4.656%.
The yield curve between 2- and 10-year notes steepened to 46 basis points.
LESS CHANCE OF A HIKE
Fed funds futures traders are now pricing in 44% odds of an interest-rate hike at the Fed's September meeting, down from 55% before the data. They nonetheless are maintaining bets on a rate increase this year, seeing a 77% probability by December.
The labor market has remained a relatively bright spot in the U.S. economy, even as concerns mount over stubbornly high inflation - a risk that could intensify if the Iran conflict continues driving oil prices higher.
A weakening jobs picture could shift expectations toward a more dovish Fed policy stance. Consumer price inflation data for July due next week, however, may further complicate the picture if it shows worsening price pressures.
Yields are likely to stay choppy as traders keep a close eye on how the Iran conflict ultimately resolves.
Oil prices climbed on Friday amid worries over talks between Iranian and U.S. negotiators to end fighting that has lasted five months.
Meanwhile, the Treasury Department will test demand for longer-dated debt next week, when it sells $125 billion in coupon-bearing debt.
The sales will include $58 billion in 3-year notes, $42 billion in 10-year notes and $25 billion in 30-year bonds.
