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Bond Brief: Fear of Full Employment

Updated from 12:28 p.m. EST

The yield curve inverted again Thursday, with Fed watchers fretting that labor market strength in Friday's jobs report could mean at least one more interest rate hike in March.

"We're essentially unchanged on the day ... and the market is positioned short before the January payroll number," says Rick Klingman, chief Treasuries trader at ABN Amro.

Wall Street estimates are looking for the January payroll report to show that employers added 250,000 workers, compared with 108,000 jobs created in December.

The benchmark 10-year note was flat on the day to yield 4.56%, while the 30-year bond gained 6/32 of a point to yield 4.69%. Prices and yields move in opposite directions.

The five-year note was unchanged to yield 4.50%. The two-year note was also little changed and was yielding 4.58%, 2 basis points more than the 10-year yield.

Longer-dated maturities usually yield more to compensate investors for taking on the additional risk of a longer-term loan.

When yields on the short end rise higher, "inverting" the curve, it could mean that investors see more risk in the near term, a perception that has historically preceded an economic slowdown or recession.

A morning report on weekly jobless claims ramped up speculation that Friday's payroll number will come in at or above Wall Street expectations.

Initial claims for unemployment benefits unexpectedly fell by 11,000 to 273,000, vs. expectations for claims to rise to 295,000, according to a report from the Department of Labor.

The decline also leaves the four-week moving average at 284,000, the lowest level since June 2000.

"The continued low level of jobless claims is leading people to believe that the labor market is fairly strong," says Klingman.

Fed officials have hinted in speeches past that they are carefully monitoring the employment picture because the U.S. is close to "full employment," or the lowest level of unemployment possible before wage inflation sets in. Bond traders loathe inflation because it erodes the value of fixed-income investments.

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