U.S. 10-year yields jump most since October

NEW YORK (MarketWatch) � Treasury prices dropped on Friday, pushing benchmark 10-year yields up by the most in more than three months, after the U.S. government said the economy added many more jobs in January than expected, boosting confidence that the economy continues to grow.

�We realize that U.S. economic growth probably will not be what it was as in prior post-war recoveries, but that does not mean that we always need to be fearful and pricing in an economic collapse around every bond market corner,� said George Goncalves, head of U.S. rates strategy for Nomura Securities.

Yields on 10-year notes 10_YEAR �, which move inversely to prices, rose 12 basis points to 1.95%, the biggest one-day increase since late October. In morning action, yields hovered near their lowest level in about six weeks. A basis point is one one-hundredth of a percentage point.

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Thirty-year bond yields 30_YEAR �jumped 14 basis points to 3.15%.

Yields on 5-year notes 5_YEAR �rose 7 basis points to 0.78%, after touching a record low earlier this week.

Two-year yields 2_YEAR �rose 2 basis point to 0.25%.

Bonds turned down after the Labor Department said the economy added 243,000 jobs in January. Also, the unemployment rate unexpectedly declined to 8.3%, down from December�s 8.5% rate. See story on jobs report.

Analysts and investors had expected a somewhat disappointing employment report, but the sell-off in bonds may be limited as they remain cognizant that the Federal Reserve�s keeping the door open to undertake another large-scale bond purchase program, sometimes referred to as a third round of quantitative easing, or QE3.

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Muddling growth of around 2% �remains disappointing and keeps inflation fears very much at bay,� said David Ader and Ian Lyngen, bond strategists at CRT Capital Group. �This is why the market is behaving so well. It�s about neutral positions occasionally getting bounced by efforts to sell strength that simply is not working because the big backdrop is QE3, or the risk thereof.�

�We can talk as much as we want to about the merits and odds of such a program, but, well, you don�t fight the Fed,� they wrote in emailed comments.

Ten-year yields are up from 1.90% a week ago, reversing part of the prior week�s rally. Thirty-year yields have increased from 3.06% last Friday, while 2-year yields crept up from 0.22%.

Last week, 5-year yields ended at 0.75%.

Treasury yields extended their rise after the Institute for Supply Management�s survey of the U.S. services sector last month also came in stronger than expected. Read more on ISM.

Ten-year yields could rise toward the high end of their recent range, around 2.16%, according to bond strategists at Nomura Securities.

If the Fed does undertake QE3 � most likely by purchasing mortgage-related debt � investors shouldn�t expect the same impact on the Treasury market as was seen with its previous bond purchases.

�The key difference in terms of market impact is that while [10-year] rates sold off 120 basis points [or more] during QE1 and QE2, the selloff from QE3 will be more contained,� Goncalves wrote in a note. �The economic recovery remains uncertain and Fed-on-hold keeps front-end rates pinned, while euro-zone risks lurk in the background.� Read more on euro, dollar.