TREASURIES-Yields drop after U.S. jobs report disappoints

Fri Sep 5, 2014 9:38am EDT

* U.S. economy creates 142,000 jobs in August, lower than expected

* Analysts don't see this jobs report as changing Fed policy

* Traders see first Fed hike in July 2015

By Gertrude Chavez-Dreyfuss

NEW YORK, Sept 5 (Reuters) - Benchmark U.S. Treasury debt yields fell from one-month highs on Friday after data showed the world's largest economy created fewer jobs than expected last month, reinforcing the view that the Federal Reserve would wait until the second half of next year to raise interest rates.

Still, market participants believe this one payrolls report is an anomaly and would not change the trajectory of future U.S. monetary policy.

Yields on U.S. 10-year notes and 30-yar bonds dropped to session lows after the U.S. non-farm payrolls report, which showed U.S. employment growth was the smallest in eight months.

Non-farm payrolls rose just 142,000 last month, far below expectations of 225,000, the Labor Department said on Friday. The unemployment rate fell one-tenth of a percentage point to 6.1 percent as people dropped out of the labor force.

June and July data were also revised lower to show 28,000 fewer jobs created than previously reported.

Following the jobs report, interest rate traders now attach a 68 percent probability that the first Fed rate hike would occur in July 2015, based on CME FedWatch, which tracks rate hike expectations using its Fed funds futures contracts.

"I don't think this (jobs report) is enough to derail the Fed in its bid to normalize monetary policy," said David Coard, head of fixed income sales and trading at Williams Capital Group in New York. "Overall, I think the jobs picture remains solid. And we do expect the 10-year yield to get above 3.0 percent by the end of the year."

In mid-morning trading, U.S 10-year Treasury notes were up 9/32 in price to yield 2.41 percent, down from a yield of 2.45 percent late Thursday. Yields earlier hit 2.48 percent, the highest since Aug. 6.

U.S. 30-year Treasury bonds also rose, trading up 7/32 in price to yield 3.19 percent, down from 3.20 percent on Thursday. Yields climbed to 3.23 percent earlier in the session, a two-week peak.

David Ader, head of government bond strategy at CRT Capital in Stamford, Connecticut also thinks the jobs report "doesn't shift things very much for later months." He added that the August non-farm payrolls data is notorious for later upward revisions. (Reporting by Gertrude Chavez-Dreyfuss; Editing by Nick Zieminski)

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