Treasury prices reached their highest levels in more than two months Friday, after the surprisingly weak July jobs report sent retail investors on a buying spree.

Late in the day, the 30-year bond was up 1 1/8 points to yield 8.24%. That is the lowest closing yield on the long bond since late May.

Economists said the feeble statistics for July, including a 51,000 drop in nonfarm payrolls, were more evidence that the economic recovery is an anemic one -- and that increases the possibility the Federal Reserve will need to ease monetary policy again.

The favorable economic news made Treasury securities look good to investors Friday and should ensure strong demand for this week's $38 billion of refunding supply, although some traders worried that retail buyers may have gotten their fill on Friday.

Most of the move higher occurred right after the payrolls number was released.

The 51,000-job drop in July payrolls was far below the 65,000 gain the market expected. Not only were there fewer workers, but those still on the job worked fewer hours: the average work week fell 0.4-point, to 34.1 hours.

Payrolls have now fallen for two months in a row after a single month's gain in May.

"In my view, the economy had a burst in May and it slowed down after that," said Joseph Plocek, an economist at McCarthy, Crisanti & Maffei. "This number is confirming that.

"You have to say that there's a risk the Fed's going to ease again," Mr. Plocek continued. "Payrolls are flashing a warning signal, money is flashing a warning signal."

The weakness in July suggests it is possible the economy will reenter the recession, but analysts warned against reading too much into just one month's worth of statistics.

"Most of the data have been favorable for the last couple of months and this doesn't change that," said Jerry Gluck, an economist at Mitsubishi Bank. "But it obviously causes a lot of doubt about the durability of the recovery."

Most areas showed job losses, including a 22,000 drop in construction. The only gains occurred in manufacturing, where 13,000 jobs were addeed, but Mr. Plocek said that sector was likely to erode over the course of the summer because the process of changing-over auto factories to the new models is being stretched out this year.

The good news in the report included a small decline in hourly earnings, which suggested inflation is under control, and upward revisions to May and June's payrolls. May now shows a 151,000 increase, up from the 119,000 originally reported, and June now shows a 21,000 decline, up from the 50,000 decrease reported last month.

The 0.2-point decline in the July unemployment rate, to 6.8%, looked like good news, but economists said it just showed the labor force was getting smaller as discouraged unemployed workers withdrew from the job market.

Economists said it is now more

Treasury Market Yields

Prev. Prev.

Friday Week Month

3-Month Bill 5.62 5.71 5.73

6-Month Bill 5.79 5.93 5.95

1-Year Bill 6.02 6.22 6.39

2-Year Note 6.67 6.84 7.01

3-Year Note 6.96 7.20 7.41

4-Year Note 7.11 7.33 7.57

5-Year Note 7.61 7.80 7.99

7-Year Note 7.88 8.04 8.21

10-Year Note 8.04 8.19 8.32

20-Year Bond 8.23 8.34 8.46

30-Year Bond 8.24 8.38 8.48

Source: Cantor, Fitzgerald/Telerate

likely the Federal Reserve will have to lower either its target for fed funds, now at 5 3/4%, or the discount rate, currently at 5 1/2%, but few expected the Fed to implement a change in policy immediately.

Mr. Gluck said the Fed would probably wait to see another month's employment data before making any move. He said that if money growth continues to lag, the Fed might decide to ease at the Aug. 20 Federal Open Market Committee meeting.

"Had we seen a little more concern at the Fed over the last few weeks, I might feel differently," he said. "But the tone was too positive before this report came out to allow them to immediately ease."

Traders said retail investors were big buyers Friday, especially of short-term and intermediate paper.

But the price levels the market has managed to reach just ahead of next week's $38 billion quarterly refunding left traders gasping for breath.

A government coupon trader said the market had fully priced in a Fed ease and he said prices ought to go lower if the Fed doesn't ease today. "We just don't see people being willing to take down paper at these levels without concrete evidence of a Fed ease."

And some participants worried that retail accounts emptied out their pockets last week and will have to sit out this week's auctions.

A government bond trader said there seemed to be "an almost insatiable appetite for securities" right now.

"But $38 billion is a lot of paper," the trader said.

Joel Naroff, a senior economist at Fidelity Bank in Philadelphia, said Treasury prices might erode a little going into the auctions.

But he said the long end was likely to be reassured as Friday's July producer price report approaches. Mr. Naroff is expecting a flat producer price index for July and said that would confirm the reasonableness of current Treasury yields.

The September bond future contract closed at 95 30/32, up 1 3/8 points.

In the cash market, the 30-year 8 1/8% bond was 1 3/16 higher, at 98 18/32-98 22/32. to yield 8.24%.

The 8% 10-year note rose 3/4, to 99 18/32 - 99 22/32, to yield 8.04%.

The three-year 7% note was up 11/32, at 100-100 2/32, to yield 6.96%.

In when-issued trading, the three-year note to be sold tomorrow was quoted at 7.03%, the 10-year note to be sold Wednesday stood at 8.03% and the 30-year bond to be auctioned Thursday was trading at 8.23%.

Rates on Treasury bills were lower, with the three-month bill off six basis points at 5.48%, the six-month bill down nine basis points at 5.56%, and the year bill 13 basis points lower at 5.69%.

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