Nonfarm payrolls increased by 311,000 last month, the Labor Department said, above the 205,000 estimate of economists polled by Reuters, while average hourly earnings rose by 0.2% in February, slightly below the expected 0.3%, giving hope that the Fed can be less aggressive in its path of interest rate hikes. January's report was revised only slightly lower to 504,000 jobs from the previously announced 517,000
"Overall it’s not a 500,000 or 600,0000 type of number the market was worried about but it is still keeping on above expectations and still showing you the tightness," Vishal Khanduja, co-head of broad markets fixed income at Morgan Stanley Investment Management in Boston.
"You took out the sort of tail risk scenario that this was going to be a January repeat so the rates market took a little bit of solace in that. So it sort of leads to that debate of 25 or 50 basis points at the next meeting, it reduces the strong case for 50 basis points or going super-hawkish for the Fed in the next meeting."
The yield on 10-year Treasury notes was down 21.1 basis points at 3.712%.
Expectations for a larger rate hike by the Fed at its March 22 policy announcement lessened after the jobs data, with fed funds futures now projecting a 39.5% chance of a 50 basis-point hike, down from 68.3% on Thursday, according to CME's FedWatch Tool.
The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was down 21.7 basis points at 4.683%. The yield is down about 41 basis points over the last two days, its biggest drop since the financial crisis in September 2008.
Yields tumbled on Thursday in part due to worries about the banking sector, as SVB Financial was exploring options, including a sale, after its efforts to raise capital through a stock sale failed, sources familiar with the matter said. "What the market is probably questioning – the monetary policy changes we have seen over the last 14 months, is that having an effect and expediting these situations in the banking sector. Meaning the broader question is, is this a contagion, is this the first one, or is it just an idiosyncratic issue of that bank and how it was managed," said Khanduja. The yield on the 30-year Treasury bond was down 15.7 basis points at 3.713%.
A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes , seen as an indicator of economic expectations, was at -97.3 basis points. The breakeven rate on five-year U.S. Treasury Inflation-Protected Securities (TIPS) was last at 2.406%, after closing at 2.501% on Thursday. The 10-year TIPS breakeven rate was last at 2.26%, indicating the market sees inflation averaging 2.3% a year for the next decade. (Reporting by Chuck Mikolajczak in New York Editing by Kevin Liffey and Matthew Lewis)
