NEW YORK (CNN/Money) - Treasury bonds rallied but the dollar fell sharply Friday after a solid February job report convinced investors that the Federal Reserve would stick with its "measured" pace of interest rate hikes.

The benchmark 10-year note advanced 17/32 of a point to 97-15/32 to yield 4.31 percent, down from 4.38 late Thursday.

The 30-year bond soared 1-11/32 points to 110-27/32 to yield 4.65 percent, down from 4.74 percent late Thursday. Bond prices and yields move in opposite directions.

The five-year note gained 6/32 of a point to yield 3.96 percent, while the two-year note also edged slightly higher to yield 3.56 percent.

The Labor Department reported that there was a net gain of 262,000 jobs in the month, compared with the revised 132,000 gain reported in January. Economists surveyed by Briefing.com had forecast a gain of 225,000.

The widely anticipated monthly employment report came in stronger than Wall Street's expectations for only the second time in the last nine months.

But all of the details were not as strong as the headline number suggested. The unemployment rate rose to 5.4 percent in February from January's 5.2 percent. The length of the average workweek was unchanged at 33.7 hours, and so were hourly earnings at $15.90, after a five-cent gain in January.

"The inflation story embedded in this report is really not that bad," Dominic Konstam, head of interest rate strategy at CSFB, told Reuters. "People are coming back into the labor force and wage pressures aren't showing, so this is generally good for bonds."

Treasury investors were worried that a stellar payrolls report would signal to the Federal Reserve that inflation is ramping up, prompting the central bank to step up its monetary tightening pace.

Worries about inflation, which erodes the value of fixed income investments, have lately kept the 10-year note near its highest yield since Dec. 2, when it reached 4.42 percent during the session and ended the day at 4.41 percent in New York, according to Reuters.

Short-term yields have also reached their highest levels in three years as the market priced in at least three more quarter-point hikes from the Fed at coming policy meetings, Reuters said.

Also bullish for bonds was the University of Michigan's final consumer sentiment index, which dipped to 94.1 in February from 95.5 in January.

Meanwhile, the jobless data sparked a sharp dollar sell-off across the board, with the euro buying $1.3239, up from $1.3112 late Thursday. The dollar bought ¥104.75, down from ¥105.29 late Thursday in New York.

Even though the report beat forecasts, more important for the dollar was the fact that it did not beat by as much as the market had anticipated.

Following a strong service sector employment indicator on Thursday, some estimates for the payrolls report had risen as high as 400,000, traders said, making the result at 262,000 jobs a disappointment.

"If you look at this from a directional standpoint, I think you'd look to be short of dollars," Todd Elmer, currency strategist at Barclays Capital in New York, told Reuters.

"We are not so sure that the (dollar) slide will trigger a significant downtrend in the dollar against major currencies so, for the moment at least, we would just feel our way into short dollar positions using some of the higher yielders," Steve Barrow, chief global currency strategist at Bear Stearns, wrote in a research note after the jobs data, according to Reuters.