The weaker-than-expected June employment report triggered a big rally in the Treasury market, but not big enough to push yields below their best levels of the week.

In short, the June jobs report was weak enough to convince bond traders that there is less need for the

Fed to hike interest rates, but not weak enough to convince them that the Fed is through hiking rates.

Specifically, while job growth has clearly slowed, the labor market remains very tight, putting the economy at risk of accelerating inflation.

The benchmark 10-year Treasury note traded up as much as 22/32 intraday, but ended just 8/32 higher at 103 16/32, dropping its yield 3 basis points to 6.014%.

The shortest-maturity Treasuries, which are most directly influenced by the

fed funds rate, were the best performers on the day. The two-year note's yield, for example, shed 6.1 basis points to 6.305% as its price rose 4/32 to 100 4/32.

The 30-year Treasury bond rose 19/32 to 105 11/32, lowering its yield 4 basis points to 5.868%.

And at the

Chicago Board of Trade

, the September

Treasury futures contract added 14/32 to 97 20/32.

Treasuries were lifted by the news that the economy added just 11,000 new nonfarm jobs in June. Economists polled by

Reuters

had forecast a gain of 263,000, on average, in line with the recent trend.

That's not as lousy a forecasting job as it appears though. The earlier-than-expected departure of some 190,000 temporary workers from the ranks of the Census-takers caused government payrolls to shrink by 195,000. Meanwhile, private payrolls added 206,000 jobs.

The gain in private payrolls was in line with recent trends. Last year, the average monthly gain in private payrolls was 202,000.

But crucially, last month's determination that private payrolls shrank in May was not revised away. In fact, the loss of jobs was determined to have been even larger than originally thought -- 165,000 vs. an original estimate of 116,000. The decline was the first since May 1995 and the largest since April 1991.

The average pace of job growth so far this year is 177,000. That's what leads bond market participants to conclude that the economy is slowing, taking pressure off the Fed to hike interest rates.

At the

Chicago Board of Trade

, where

fed funds futures are listed, traders discounted 38% odds of a 25-basis-point hike in the fed funds rate at the Fed's next meeting on Aug. 22, down from 54% yesterday.

The rub in the report was the news that the unemployment rate retreated, in line with expectations, to 4.0% from 4.1%, indicating that labor market conditions remain very tight. That's risky because it could force employers to pay up for workers, leading to higher inflation.

An alternative measure of labor market conditions that is a new favorite of Fed Chairman

Alan Greenspan's, the

augmented unemployment rate, also fell, to 6.8% from 7.0%, as the pool of available workers fell 3.4% to 9.8 million, a low for the current expansion.

Meanwhile, average hourly earnings rose 0.4%. This was in line with expectations, but it's a relatively large gain, and it reinforced the sense that the Fed may have more work to do on the interest-rate front.

"There are definite signs of a slowdown," said Mark Mahoney, Treasury market strategist at

UBS Warburg

. "But you're not getting any signs inflation is going to come off."

Because the labor market is still tight, Mahoney added, "you can't really begin to price in an

interest-rate ease

by the Fed, just less of a tightening."

Economic Indicators

In other economic news, the

Future Inflation Gauge

(

definition |

chart ) fell to 122.6 in June from 122.7 in May.

Currency and Commodities

The dollar rose against the yen and the euro. It lately was worth 107.90 yen, up from 107.48. The euro was worth $0.9480, down from $0.9505. For more on currencies, please take a look at

TSC's

Currencies column.

Crude oil for August delivery at the

New York Mercantile Exchange

rose to $30.25 a barrel from $29.99.

The

Bridge Commodity Research Bureau Index

rose to 219.33 from 217.88.

Gold for August delivery at the

Comex

rose to $284.70 an ounce from $284.60.