Bonds tumble on employment reading

NEW YORK (CNNMoney.com) -- Treasury prices sold off sharply Friday after the government's September jobs creation report dimmed hopes for a rate cut later this month.

Investors were disappointed not only by the Labor Department's news of a gain of 110,000 jobs in September, but also by a revision to the department's report of a decline in jobs in August. Instead of losing 4,000 jobs in August, the government now says the economy gained 89,000. The department also said average hourly earnings rose 0.4 percent, putting year-over-year wage growth at 4.1 percent, a signal of higher inflation that could also reduce the chances of a rate cut when the Fed meets Oct. 30-31.

"This is a number that definitely takes euphoria off the table," said John Flahive, head of fixed-income strategy at BNY Mellon Wealth Management. "Before this number, the bond market was leaning toward economic numbers that would make the Fed cut rates. But now the market's psychology will have to shift."

The unemployment rate ticked higher to 4.7 percent from 4.6 percent in August, but analysts said that component alone was unlikely to persuade the Fed to drop rates this month.

The benchmark 10-year Treasury note fell 31/32 to a 4.64 percent yield, up from 4.53 percent at Thursday's close. Prices and yields move in opposite directions.

The 30-year long bond dropped 1 22/32 to yield 4.87 percent, contrasting with 4.77 percent at Thursday's close.

The 2-year note fell 6/32 to yield 4.09 percent, up from 3.99 percent at Thursday's close.

The yield on the 3-month Treasury bill rose to 3.99 percent from 3.94 percent Wednesday and the discount rate advanced to 3.89 percent from 3.84 percent.

The labor report also cut short debate about whether the economy could be contracting. "The odds of a recession are just not as high as people had thought," said Joe Patire, managing director of Yield Curve LLC.

Patire predicted more selloffs for Treasurys in coming sessions to allow the market to adjust to its new expectation that there will be no rate cut this month.

Heavy selling also would drive Treasury yields higher to make them conform to the Fed funds rate, which stands at 4.75 percent. Last month buying sprees sent yields lower to reflect expectations then that official rates would fall.

There was a very broad range of economists' expectations for the report. Thomson Financial set a median forecast of jobs creation of 115,000 but noted there were predictions as low as 50,000 and as high as 150,000.

However, most economists expected jobs creation to rebound, after the initial report that the economy gave up 4,000 jobs in August, a factor widely seen as instrumental in convincing the Fed to order a hefty half-percentage point cut in the Federal funds rate in September. The revision to a gain of 89,000 jobs was another reassuring signal for the labor market, but it was also news that makes an October rate cut less likely.

Fed Vice Chairman Donald Kohn further doused rate-cut hopes by saying the Fed's Sept. 18 half-percentage point rate reduction might suffice to keep the economy on course.

Although the Treasury market overall has been hoping for a rate cut, the decreasing likelihood of a reduction this month holds some good news for bonds. Cheapening the cost of money tends to stir inflation, which the market abhors because it cuts into the value of bonds.