The weaker-than-expected February employment report triggered a rally in Treasuries that benefited the shortest-maturity issues most.

The action reflected the view that if future employment reports look anything like

last month's, the

Fed

won't have to hike the

fed funds rate

, a short-term rate, as much or as quickly as previously believed.

The report initially sent all Treasury prices higher, but the gains moderated over the course of the day as stock proxies moved inexorably higher.

The exuberance in stocks "makes it tough to get any sizable reaction in Treasuries,"

Credit Suisse First Boston

senior market economist Mike Cloherty said. "It really is amazing how bond trading is sort of a second derivative of equity trading lately."

Rising stock prices have dogged the bond market because of the connection between the stock market and the rapid pace of consumer spending, which is fueling economic growth at what the Fed has called an unsustainable pace.

The benchmark 10-year Treasury note, which rose as much as 10/32 in the 40 minutes after the 8:30 a.m. EST release of the jobs report, ended up just 1/32 at 100 27/32, trimming its yield a fraction of a basis point to 6.383%. The two-year note, which spiked 6/32 at 8:30 a.m., ended up 2/32 at 100, cutting its yield 3.5 basis points to 6.499%.

The 30-year bond, the erstwhile benchmark whose price has been driven up by government plans to reduce the supply of long-maturity debt, finished up 3/32 at 101 22/32, trimming its yield a fraction of a basis point to 6.126%.

At the

Chicago Board of Trade

, the June

Treasury futures contract closed up 13/32 at 95 15/32.

The February jobs report was positive for the bond market in all major respects. The economy's weaker-than-expected performance was seen as taking pressure off the Fed to hike the fed funds rate aggressively in the months ahead.

Nonfarm payrolls

, the report's most closely watched component, expanded by just 43,000 in February. Economists polled by

Reuters

had forecast a gain of 206,000.

At the same time, the

unemployment rate

edged up from January's 30-year low of 4.0% to 4.1%. A slackening of the labor market is positive because it reduces the threat of wage inflation.

Speaking of which,

average hourly earnings

rose 0.3%, in line with expectations. At 3.6%, the year-on-year pace of wage growth remains lower than it's been for most of the last three years.

But while the results were unambiguously positive for the markets, they don't change the likely outcome of the

TST Recommends

Federal Open Market Committee's

March 21 meeting, which is a hike in the fed funds rate from 5.75% to 6%, market analysts said. At the CBOT, the

fed funds futures

continue to fully discount the move.

Rather, the report raises the hope that over the course of the next several months, the Fed won't hike rates as many times or as quickly as some fear it might.

"This far from puts an end to the tightening, but if we get more data like this is could alter the pace," Cloherty said. The February data "clearly tell you the extraordinary numbers of the previous two months were overstating matters." The economy added 384,000 jobs in January and 309,000 in December.

Economic Indicators

Also today,

factory orders

were reported to have dropped 1.1% in January, dropping the year-on-year growth rate to 7.1% from 10.6%. The factory orders report revised the January drop in

durable goods orders

to 1.9% from 1.3%. The ex-transportation drop was revised from 0.5% to 1.2%.

The

Consumer Sentiment Index

for February was revised to 111.3, down from a record high of 112 in January.

And the

Purchasing Managers' Non-Manufacturing Index

rose to 58 in February from 52.5 in January.

Currency and Commodities

The dollar fell against the yen and rose against the euro. It was worth 107.67 yen, down from 107.78 yesterday. The euro was worth $0.9610, down from $0.9642 yesterday. For more on currencies, please take a look at

TSC's

new

Currency Watch column.

Crude oil for April delivery at the

New York Mercantile Exchange

fell to $31.45 a barrel from $31.69 yesterday.

The

Bridge Commodity Research Bureau Index

rose to 213.51 from 212.12 yesterday.

Gold for April delivery at the

Comex

rose to $290.30 an ounce from $289.70 yesterday.