Bond Brief: Yields Spike

Along with the housing market, the employment picture is seen as the key to when the data-dependent Fed will stop raising interest rates. Central bankers have voiced concerns that "wage inflation" could occur if unemployment drops and salaries increase enough to ramp up consumer spending.

"Few great surprises here," says David Ader, U.S. government bond strategist with RBS Greenwich Capital. He called the fall in the unemployment "scary," but was encouraged by the tame hourly earnings number. On net, the report was neutral, he said, but "it certainly keeps a Fed hike on for May," with risks for more increases.

Anthony Crescenzi, chief bond market strategist at Miller Tabak and a RealMoney contributor, agrees. He also contends that Treasury yields almost always trade above the fed funds rate, which is currently at 4.75%. With 5.0% on the table, it seems that the market will see more yield steepening ahead as traders factor in a higher fed funds rate.

Treasuries on all parts of the curve ended the first quarter with an average 1.2% loss, according to Merrill Lynch data, the worst start to a year since 1999.

But Matthew Smith, a portfolio manager at Smith Affiliated Capital, questioned the accuracy of the March payrolls report. He noted that goods-producing industries added 45,000 jobs, including a surprising gain of 41,000 in construction while manufacturing firms cut 1,000 jobs, the first decline since September.

Given that the housing market has been cooling and recent Institute of Supply Management surveys show a strengthening manufacturing sector, Smith says it's odd that construction jobs were added and manufacturing jobs lost.

"The perception that the U.S. economy is a runaway freight train is mistaken -- things are slowing," he says.

Elevated commodity prices have recently fed inflation worries, as policy makers cited rising energy and commodities costs among the reasons they raised rates at the March 28 Federal Open Market Committee meeting.