Action-packed start to 2010 for U.S. Treasuries

NEW YORK (Reuters) - The U.S. government bond market starts the New Year with an action-packed week of major data releases, including a monthly jobs report that could shape investors' views on the rest of 2010.

The dismal job market has been the weakest point of the tentative U.S. economic recovery, but signs of hope recently led some economists to conclude employment growth may have commenced in December.

Although this is still the minority view, its adherents gained support on Thursday, when government figures showed an unexpected drop in the number of filings for jobless benefits during the latest week.

The claims numbers and possibility of a positive payrolls report represent a threat to investors who have socked away savings in safe-haven Treasuries on the view that weak economic conditions will keep inflation low and bond prices stable.

"I think that's really what the purpose of today's jobless claims was, kind of a forward read for that," said Aaron Kohli, interest rate strategist RBS Securities in Stamford, Connecticut.

"Treasuries have sold off right after and RBS economists are looking for a positive print in the number that is coming up ... in the payrolls number."

Inflation is the arch-enemy of long-term bond holders because it erodes the value of cash flows from fixed income assets.

Employment growth could force the Federal Reserve to consider raising interest rates sooner than previously expected to head off accelerated price growth, hitting shorter-term bonds, which trade primarily on monetary policy expectations.

All of this raises the stakes for next Friday's nonfarm payrolls report.

Analysts polled by Reuters expect the report to show payrolls fell by 20,000 in December, based on the median of their 38 forecasts, which would be worse than November's decline of 11,000 jobs.

However, the predictions ranged widely, from a loss of 80,000 jobs to an increase of 50,000. The unemployment rate is expected to edge up to 10.1 percent from 10.0 percent.

Before the jobs report, however, economists will scrutinize Monday's national manufacturing report from the Institute for Supply Management, which is expected to show a slight acceleration in the sector's growth.

Factory orders and pending home sales are the highlights of Tuesday's data and a slew of private sector employment figures comes out Wednesday, along with a reading on the health of the services sector.

Traders returning from the long weekend after Friday's New Years Day holiday will already have comments to digest from Fed Chairman Ben Bernanke, who speaks on Sunday, January 3 before the American Economic Association's annual meeting in Atlanta.

(Reporting by Burton Frierson; Editing by Dan Grebler)