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Treasuries ended an abbreviated session with substantial gains, as the rout in the stock market took away the pain of a September employment report ( definition | chart | source ) that seemed to erase any chance of an interest rate cut by the Fed in the next several months.

The gains in the bond market may have been exaggerated by the fact that the bond trading session ended at 2 p.m. EDT ahead of what is a long weekend for bond traders, said Ken Logan, managing analyst at

Thomson Financial/IFR

. Fearing that stock prices would keep falling after 2 p.m. (as they ultimately did), bond traders loaded up early. Bond trading is also suspended on Monday for Columbus Day, while the stock market is open.

After trading down as much as 10/32 in the morning, the benchmark 10-year

Treasury note finished up 8/32 at 99 15/32, dropping its yield 3.5 basis points to 5.821%. Shorter-maturity yields shed comparable increments.

The 30-year

Treasury bond gained 28/32 to 105 25/32, lowering its yield 6 basis points to 5.836%.

At the

Chicago Board of Trade

, the December

Treasury futures contract gained 19/32 to 98 28/32.

The September jobs report dealt an early blow to the bond market with the news that the unemployment rate had dropped to an extremely low level, and that the pace of job creation remained healthy.

Under those circumstances, the Fed is unlikely to cut interest rates. After its latest meeting on Tuesday, the

Federal Open Market Committee released a

statement citing high labor-utilization rates (the flip side of very low unemployment rates) as a main reason why it remained concerned about the potential for the inflation rate to climb.

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The September jobs report measured a decline in the unemployment rate to 3.9% -- matching the 30-year low it hit in April -- from 4.1% in August.

Labor market conditions tightened by a more obscure measure as well. The

augmented unemployment rate -- the specific measure the FOMC alluded to -- fell to 6.8% from 6.9% as the pool of available workers shrank to 9.826 million from 10.042 million.

At the same time, the employment report said the economy created 252,000 new nonfarm jobs in September. Netting out the 27,000 temporary Census jobs that disappeared, and the reappearance of 75,000 jobs that weren't counted in August because of a strike against

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, the underlying increase was 204,000, in line with the recent trend. A shift in monetary policy is unlikely to occur unless there is a pronounced slowdown in the pace of job-creation.

By the same token, the report did not lead people to believe that the Fed might hike interest rates. Although the labor market is tight and the pace of job creation is healthy, there are few signs of wage inflation. The report said average hourly earnings increased just 0.2% in September, and that their annual growth rate slowed to 3.6% from 3.8%.

Bond prices fell because, over the last month, they had built in an expectation that the Fed might be forced to cut interest rates at some point in the near future. The economic data made people abandon that position.

"There was this growing belief that because of the decline in the wealth effect from stocks, the economy would slow and the Fed would ease," Logan said. In other words, dropping stock prices would slow the economy by making people less wealthy, and therefore less inclined to spend money. "Today's numbers strongly challenge that notion."

Treasuries, short-maturity issues in particular, which are most directly affected by monetary policy, "got hurt in reaction to the unemployment rate more than anything else," said Mark Mahoney, Treasury market strategist at

UBS Warburg


The recovery began shortly after 10 a.m. EDT, when stock prices started to fall steeply, and continued through the rest of the session.

The Treasury market, the

fed funds futures market and the

eurodollar futures market "were starting to price out the ease scenario because of the data, but stocks turned that trade right around," Logan said.

Once again, people started buying bonds on the belief that a continued, protracted decline in stock prices will slow the economy. There was also some "flight-to-quality" buying of bonds, but that was less of a factor, Logan said.

The bond market's response to the action in

Nasdaq stocks in particular has become familiar, UBS Warburg's Mahoney said. "Every time that has happened the last few weeks, it brings

intermediate-maturity Treasuries right back," he said. "All of a sudden we're thinking about the Fed again and problems the economy might be having."

"Something really strange is going on," Mahoney continued. "The

economic numbers are strong, but the stock market keeps falling because of earnings. Financial markets are sending signals there are problems, but it's not apparent in the economic numbers."

Economic Indicators

In other economic news, the

Future Inflation Gauge


definition |

chart ) fell to 120.2 in September from 121.3 in August.

Currency and Commodities

The dollar fell against the yen and gained against the euro. It lately was worth 108.79 yen, down from 109.13. The euro was worth $0.8678, down from $0.8686. For more on currencies, see


Currencies column.

Crude oil for November delivery at the

New York Mercantile Exchange

rose to $30.85 from $30.53.


Bridge Commodity Research Bureau Index

dropped to 226.00 from 226.42.

Gold for December delivery at the


fell to $272.00 an ounce from $273.40.