Treasurys post weekly gain after jobs report

NEW YORK (CNNMoney.com) -- Treasurys surged and are on track to post weekly gains Friday as investors changed their focus from company earnings to economic data, including the government's worse-than-expected monthly jobs report.

What prices are doing: The two-year note's yield dropped below 0.5% for the first time ever Friday, but then pared back some of those losses to trade at 0.51% later in the day. At the closing bell its price was up 2/32 to 100-8/32. Bond prices and yields move in opposite directions.

The benchmark 10-year note jumped 23/32 to 105-25/32, and its yield fell to 2.82% from 2.91% late Thursday.

The 30-year bond rose 1-1/32 to 106-19/32 and its yield slipped to 4%. The 5-year note edged up 10/32 to 101-6/32 with a 1.51% yield.

What's moving the market: A closely watched monthly employment report from the government showed the U.S. economy shed 131,000 jobs in July. It was an improvement from the revised loss of 221,000 jobs in June, but a much deeper hit than economists had expected for the month.

The report also showed the private sector increased payrolls by 71,000, falling short of the 90,000 uptick economists had expected.

"Any way you slice this, it is not what the market expected and does not bode well for the hope of economic growth," Kevin Giddis, president of fixed income at Morgan Keegan, said in a note to investors.

Meanwhile, the national unemployment rate stayed at 9.5%.

The dour news increased the safe-haven appeal of U.S. Treasurys, which are backed by the government and considered low risk in times of economic uncertainty.

Bond traders were eagerly anticipating the report all week, as they look to payrolls as a major gauge of the health of the recovery.

Earlier in the week, strong earnings from European banks and reports that showed higher-than-expected manufacturing activity and construction spending sent Treasury prices lower.

Also,two separate reports by private firms showed better-than-expected job growth in the private sector but continued weakness in government and non-profit payrolls. Traders found a glimmer of hope in the private sector numbers, and that news sent Treasury prices down on Wednesday.

But otherwise, Treasurys were up overall for the week as downbeat reports on personal income, factory orders, pending home sales, weekly jobless claims and then Friday's headline jobs number all painted a gloomy picture of the recovery.

What's on tap: Bond traders are looking ahead to the Federal Reserve's rate-setting committee meeting on Tuesday but don't expect any major policy changes -- just rhetoric -- from the central bank.

"The problem for the Fed is that its 'tool box' is full of old tools that don't work on a 'new normal' economy which has failed to respond to a number of attempts by the Fed to stimulate growth," Giddis said.

"They are likely reduced to trying to 'talk up the economy' by stating that they will remain accommodative and believe in the future growth of the U.S. economy," he added.

Next week also brings new supply from the Treasury Department's $74 billion quarterly refunding. The auction refunds $33 billion of securities that are maturing, and the government hopes to raise another $41 billion. The Treasury announces refundings each quarter.

Treasury plans to bring $34 billion worth of 3-year notes to market on Tuesday; $24 billion in 10-year notes next Wednesday; and $16 billion in 30-year bonds on Thursday. The auctions will settle on Aug. 16.