US Treasuries fell on Friday as a stronger-than-expected April employment report convinced many investors that the Federal Reserve would keep raising interest rates. Shorter-dated debt suffered the brunt of the losses as dealers re-appraised their estimates for Fed action. Futures now price in a year-end fed funds rate of about 3.82 percent, up from 3.62 percent ahead of the jobs data. Two-year notes slid 10/32 to 3.72 percent, compared with 3.56 percent on Thursday. Benchmark 10-year notes fell a comparatively mild 26/32, for a yield of 4.26 percent, up from 4.16 percent. Resistance is expected at 4.30 percent to 4.32 percent.
"This report suggests the slack in the labour market is slowly diminishing and confirms the Fed in their view that they have to continue removing policy accommodation," said Elisabeth Denison, economist at Dresdner Kleinwort Wasserstein. "I think they will do so at a measured pace."
After this week's quarter-point rate hike, the federal funds rate stands at 3.00 percent, the low rung of what is often considered a "neutral" rate.
A poll taken after the jobs report of 20 banks that deal directly with the Fed found that all of those surveyed expect the central bank to raise rates by another 25 basis points in June. Almost all also see another hike in August.
The median forecast for the fed funds rate in a Reuters poll of analysts and economists conducted on Friday was for a 4.00 percent rate at the end of 2005.
Bond bulls had hoped that signs of softness in the economy might force the Fed to pause its monetary tightening campaign after one or two more increases. But the latest jobs figures dampened those expectations.
Non-farm payrolls jumped 274,000 in April, well above forecasts of 170,000, while employment in the previous two months were revised up by a total 93,000. The jobless rate held steady at 5.2 percent, as expected, and both the workweek and wages advanced.
The news shoved bonds lower, sending the five-year note down 21/32 and yields to 3.95 from 3.81 percent Thursday. The 30-year bond dropped nearly a full point, lifting yields to 4.64 percent from 4.58 percent.
Treasuries had a volatile week, swinging to and from on everything from a missing sentence from the Fed statement, talk of a return of 30-year bonds, to Standard & Poor's downgrades of Ford Motor Co and General Motors Corp.
As the dust settled, benchmark yields ended up around 8 basis points higher on the week as speculation about the possibility of a Fed pause was all but discarded.
"The jobs report negates the view that the economy is sliding and that the Fed is about to stop raising interest rates," said Gary Thayer, chief economist at A.G. Edwards & Sons.
Another interesting aspect of the payrolls report was a 0.9 percent gain in aggregate hours worked, the biggest monthly rise since February 1997. The spike suggested the second quarter got off to a much stronger start than many had foreseen.
With shorter-dated rates rising more quickly than longer-dated ones, the yield curve flattened anew. The spread between 10- and two-year notes narrowed to 54 basis points from 60 on Thursday.
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