Treasury bonds ended a five-week rout in dramatic fashion on Friday by staging the biggest rally in five months after the government said hourly earnings barely rose in February. The report boosted optimism for tame inflation, even as the economy added 275,000 jobs.
US 30-year Treasury bonds rose $14.69 per $1,000 security. Yields fell to 5.59 per cent, after reaching 5.72 per cent, the highest level since July 1997.
The jobs report also set US stocks alight. The Dow Jones Industrial Average rose 2.8 per cent, to a record high of 9,736.08. The surge, the Dow's biggest one-day rise since 15 October, pushed the index to within 3 per cent of the 10,000 level.
"The economy is still in a sweet spot," said Daniel Eagan, who helps oversee $120bn at BlackRock, the Philadelphia- based asset management arm of PNC Bank. "The market likes this."
Investors said recent news about robust growth with scant inflation may spell the end of the rout that had pushed the Dow index down as much as 5.5 per cent from its 1999 high on 8 January and lifted Treasury yields as much as 62 basis points since 29 January. February was the worst month for bonds in 19 years, according to Ryan Labs, a research firm.
Treasuries sank in recent weeks as reports on consumer confidence, manufacturing and jobs showed economic strength, spurring concerns that the Fed might raise interest rates to keep inflation from accelerating. Even after Friday's rally, investors who bought 30-year bonds on 29 January are sitting on a loss of about 7 per cent, according to Bloomberg.
The employment report didn't dispel the perception that the economy is booming. Yet the small rise in wages suggested inflation isn't about to quicken. Consumer prices rose just 1.7 per cent in the 12 months to January, near the slowest pace in 12 years.
The report "was a relief valve for the market", said John Boritzke, who helps oversee $9bn at M&I Investment Management in Milwaukee. "It's reassuring that the Fed doesn't have to tighten rates."
A report in Business Week also soothed investors' worries. It said Fed Chairman Alan Greenspan doesn't see much reason to boost interest rates because he's concerned a new financial shock could send the global economy reeling again.