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Bonds Take Note of Jobs Data

The yield on the 10-year note falls to 4.45%.

While jobless claims remained below the magic 400,000 mark last week, the stubborn lack of job growth is becoming a more serious concern.

Reflecting that and some technical factors, the yield on the 10-year U.S. Treasury note fell sharply Thursday after weekly unemployment claims rose more than economists had expected.

"We may have stabilized losses in the job market, but for the recovery to pick up, you really need to see job creation," said Brian Edmonds, head of Treasury trading at Banc of America.

The 10-year note jumped 21/32 to 98 13/32 Thursday, sending its yield down to 4.45%. The long bond was up more than a point to yield 5.24%.

Edmonds said

Federal Reserve

Chief Alan Greenspan will reiterate Friday that interest rates need to stay low "until we see a full-fledged recovery." Greenspan is due to speak at Jackson Hole, Wyo., at a symposium sponsored by the Federal Reserve Bank of Kansas City. "That should be favorable," Edmonds said, adding that "yield levels are very attractive" right now.

Jobless claims rose to 394,000 in the latest week from a revised 391,000, according to the Labor Department. Although claims were below 400,000 -- a level that is often perceived as a dividing line between job stability and job contraction -- they were above the 390,000 level anticipated by economists.

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Meanwhile, inflation continues to be subdued. The personal consumption expenditure index, the Fed's preferred measure of inflation, rose at an annual rate of just 0.7% in the second quarter.

While the Commerce Department said the economy grew at an annual rate of 3.1% in the second quarter, up from an original estimate of 2.4%, Edmonds said this wasn't unexpected and is really being considered as old news.

"Over the past couple of weeks, we have seen

unemployment claims fall, so it did start to look like the job situation was starting to moderate," said James Caron, bond strategist at Merrill Lynch. "But we've always been concerned about the lack of jobs, it's one of the major factors keeping the economy somewhat weak."

Alan De Rose, a trader at CIBC World Markets, attributed the gains in the bond market to technical factors. He noted that volume is very light ahead of the long holiday weekend, and that might be exacerbating price swings. The bond market will close at 2 p.m. EDT Friday.

"I think we're having a short-covering rally, and we've got extensions for the end of the month," he said.

The month-end removal of old securities and addition of new ones in the Lehman Brothers aggregate index are expected to increase the duration of the index. The Lehman index measures all public investment-grade bonds and is a big benchmark for many investors. Duration, which is measured in years, is a gauge of interest rate sensitivity. In order to keep their portfolios in line with the Lehman index, some investors will need to buy Treasuries.

"This is one of the last days when investors can do this, because tomorrow a lot of people aren't going to be at work," Caron said. "The mentality is, 'Let's get everything done today and there is a lot of buying coming in for that reason.'"