Jobs, Fed still weigh on bonds

NEW YORK (CNNMoney.com) -- Bonds moved slightly lower Monday as investors continued to ponder a robust employment report from last week, prompting them to speculate that the Federal Reserve will not lower interest rates anytime soon.

The dollar slipped against the euro and rose versus the yen.

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The benchmark 10-year note lost 3/32, or 94 cents on a $1,000 note, to yield 4.65 percent, up from 4.64 late Friday.

Bond prices and yields move in opposite directions.

The 30-year bond was unchanged from the previous session to yield 4.74 percent. The five-year note declined 2/32 to yield 4.66 percent, while the two-year note fell 1/32 to yield 4.78.

With virtually no major economic reports on tap, Treasury investors continued to focus on Friday's employment report by the Labor Department, which revealed that U.S. 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 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.

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

"This [latest job report] puts the market into the bears' hands," Thomas di Galoma, head of U.S. Treasury trading at Jefferies & Co. in New York, told Reuters.

But another worrisome element of Friday's employment report was an increase in average hourly earnings, which climbed 0.5 percent in December, adding pressure to inflation.

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

As of Monday, futures markets were pricing in less than a 50 percent chance that the Fed would lower rates in the first half of 2007, Reuters reported.

Delivering a speech in Atlanta Monday, Federal Reserve Vice Chairman Donald Kohn suggested that inflation was the central bank's main concern, not slower economic growth.

"A very gradual decline in the trend rate of inflation continues to be the most likely outcome, but that path is still by no means assured," Kohn said in his speech.

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

In currency trading, the dollar was mixed, after having made gains on the jobs report Friday.

The euro bought $1.3021, up from 1.3003 late Friday. The dollar bought ¥118.73, up from ¥118.68 the previous session.

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