Bonds tumble, dollar soars on jobs report

NEW YORK (CNNMoney.com) -- Bond prices plunged Friday and the dollar soared after a December employment report came in stronger than expected, fueling speculation that the central bank will not lower interest rates any time soon.

The benchmark 10-year note lost 18/32, or $5.62 on a $1,000 note, to yield 4.68 percent, up from 4.62 late Thursday.

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Bond prices and yields move in opposite directions.

The 30-year bond sank 30/32, or $9.38 on a $1,000 bond, to yield 4.77 percent, up from 4.72 the previous session. The five-year note declined 12/32 to yield 4.68 percent, while the two-year note fell 5/32 to yield 4.79.

The dollar was up sharply against the euro and pared early losses against the yen, but still remained lower.

The Labor Department said employers added 167,000 jobs in December, up from an upwardly revised 154,000 in November. Economists polled by Briefing.com had forecast a rise of 100,000 in December.

The unemployment rate stayed at 4.5 percent, in line with economists' forecasts.

"This is a bullish report for the economy," Rick Klingman, head trader on the U.S. Treasury desk with ABN AMRO in New York, told Reuters.

The stronger-than-expected reading on the labor market sent jitters through the Treasury market as investors bet the Federal Reserve may not begin cutting rates early next year.

Investors have been betting that the Fed will start lowering rates this year as the economy keeps cooling. But strength in the labor market could raise the threat of inflation and keep those cuts at bay until later in 2007.

Futures markets priced in an 8 percent chance of the Fed cutting interest rates by March, down from 20 percent just prior to the report, Reuters reported.

The Fed has held the target for its key short-term interest rate steady at 5.25 percent at its last four meetings, and minutes from the Fed's latest meeting showed policymakers are still concerned about rising prices.

Another worrisome element of Friday's employment report was an increase in average hourly earnings, which climbed 0.5 percent in December, which places pressure on inflation. Average hourly wages are up 4.2 percent from the year-ago period.

"Without a doubt, the wage picture will be regarded as threatening by Fed hawks," Pierre Ellis, senior economist at Decision Economics in New York, told Reuters.

Bond traders fear inflation since it erodes the value of the fixed-income investment.

Later Friday, a handful of central bank officials are due to speak, including Fed chairman Ben Bernanke, who is scheduled to deliver a speech in Chicago at 1:45 p.m. ET.

In currency trading, the euro bought $1.3010, down from $1.3088 late Thursday. The dollar bought ¥118.77, down from ¥119.09 the previous session.

Updated bonds and rates

A surprise leap in job gains