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CHICAGO: US Treasury yields hit multi-month highs on Friday in the wake of a weaker-than-anticipated September employment report that was still expected to keep the Federal Reserve on track with its tapering plans and as inflation expectations rose.

The benchmark 10-year yield, which dropped to a session low of 1.558% shortly after the jobs data, later climbed to its highest level since June 4 at 1.617%. It was last up 3.2 basis points at 1.603%. Yields on 20- and 30-year bonds also jumped to levels previously seen in June before easing later in the session.

"Treasuries are under a great deal of stress based on positioning for Fed tapering and also rising concerns about inflation," said John Canavan, lead analyst at Oxford Economics.

Analysts said despite underwhelming jobs data, the Fed next month was likely to announce plans to reduce its $120 billion in monthly bond purchases.

"Obviously, the headline payroll number was on the soft side, but with the upward revisions to the previous two months, I would say it was a good enough report or a decent report to qualify for the Fed to start tapering," said Kathy Jones, chief fixed income strategist at the Schwab Center for Financial Research in New York.

The Labor Department said in its closely-watched employment report that nonfarm payrolls increased by 194,000 jobs last month. Data for August was revised to show 366,000 jobs created, instead of the previously reported 235,000 positions.

Economists polled by Reuters had forecast payrolls increasing by 500,000 jobs. Estimates ranged from as high as 700,000 jobs to as low as 250,000. The unemployment rate fell to 4.8% from 5.2% in August.

Jones said the trajectory of the Treasury market was unchanged.

"We've had a steeper yield curve, rising yields, expectations for the Fed to start tightening sometime in 2022 - all that seems to be intact," she said.

The five-year note yield, which is more sensitive to intermediate interest rate hikes, reached its highest level since February 2020 at 1.059%. It was last up 2.9 basis points at 1.0481%.

Futures on the federal funds rate, which track short-term interest rate expectations, priced in a quarter-point tightening by the Fed either by November or December.

Canavan said that rising energy prices were fueling inflation concerns. Inflation expectations climbed on Friday to their highest levels since May before easing back later in the session. The breakeven rate on five-year Treasury Inflation-Protected Securities (TIPS) hit 2.679%. For 10-year TIPS, it rose to 2.520%.

Meanwhile, the US Senate late on Thursday passed a stopgap fix to the debt ceiling impasse that is expected to be taken up by the House next week. The plan would raise the debt limit by $480 billion, pushing the possibility of a government debt default from this month into early December.

"In the (Treasury) bill market, there's just a shift in which yields are under the most pressure," Canavan said.

Yields on Treasury bills due in October and early November had turned sharply higher on a default risk around Oct. 18 - the date the US Treasury projected it would run out of cash. They rapidly declined after the temporary fix surfaced in the US Congress on Wednesday, but yields in December maturities in turn have risen, according to Canavan.

A closely watched part of the yield curve that measures the gap between yields on two- and 10-year Treasury notes was last about 2 basis points steeper at 128.52 basis points. The gap between five-year notes and 30-year bonds steepened by about 1 basis point at 111.38 basis points. Following Monday's market close for the Columbus Day holiday, the US Treasury will auction $58 billion of three-year notes and $38 billion of 10-year notes on Tuesday and $24 billion of 30-year bonds on Wednesday.


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