TREASURIES-Yields steady after data; investors weigh Fed policy

Reuters

* Ten-year yields retrace after earlier hitting 2.93 percent

* Some traders see short squeeze after initial yield spike

* Strong jobs data raises bets that Fed will act sooner

* Fed buys $5.13 billion notes due 2017, 2018

By Karen Brettell and Luciana Lopez

NEW YORK, Dec 6 (Reuters) - U.S. Treasuries' yields were

steady on Friday after they briefly surged to their highest

level since September following a strong jobs report, which

caused investors to evaluate anew when the Federal Reserve is

likely to begin paring back its bond-purchase program.

U.S. employers added 203,000 jobs in November and the

jobless rate fell to a five-year low of 7.0 percent, raising

expectations the Federal Reserve will begin reducing its bond

purchases in coming months.

But Treasuries were volatile and traders said some investors

positioning for yield increases may have been caught by a short

squeeze that sent yields tumbling, leaving them be near

unchanged after an initial jump.

"I think everyone got a little too far ahead of themselves

expecting very strong economic numbers. The market priced in

most of a worse-case scenario heading into the number," said

Aaron Kohli, an interest rate strategist at BNP Paribas in New

York.

Benchmark 10-year notes were last up 2/32 in

price to yield 2.857 percent, after briefly rising as high as

2.93 percent, the highest level since Sept. 13. They have

increased from 2.70 percent a week-and-a-half ago.

The 30-year bond traded up 13/32 in price to

yield 3.890 percent.

"The market reacted pretty violently to the report, and I

think a lot of people got caught in the hole," said Charles

Comiskey, head of Treasuries trading at Bank of Nova Scotia in

New York.

Traders had expected job gains of around 200,000, higher

than economists' expectations of around 180,000, based on the

median estimate of 90 economists polled by Reuters before the

data.

The Federal Reserve will start reducing its massive

bond-buying program no later than March, according to a Reuters

poll on Friday, with a handful of Wall Street firms expecting

the U.S. central bank taking action as early as December

following a second straight month of robust jobs gains.

Still, the Fed could wait for a more sustained run of data -

and the confirmation of Janet Yellen as the new Fed chair -

before changing its policy stance.

"If you string these kind of numbers consistently for the

next six months or so I think you will see an exit, but I don't

think that's happening until after she's confirmed and after you

see these numbers fall in line," said Richard Daskin, the chief

investment officer of RSD Advisors in New York.

Improving labor market prospects also buoyed consumer

confidence in early December. The Thomson Reuters/University of

Michigan's preliminary consumer sentiment index jumped to 82.5

from 75.1 in November, a separate report showed on Friday.

The Fed will meet on Dec. 17 and 18 in its final meeting of

the year. Some traders have said that it may be more hesitant to

act in December for fear of disrupting market liquidity heading

into year-end.

A few weeks ago many traders and analysts had expected that

the Fed would be most likely to act at its March meeting.

The Fed bought $5.13 billion in notes due 2017 and 2018 on

Friday as part of its ongoing purchases.

Unemployment near 6 percent could force the Fed's hand in

coming months by making purchases politically unfeasible.

"It would be much harder for the Fed politically to continue

buying if they don't have unemployment at high levels," said

BNP's Kohli.

The Fed is seen as likely to stress its plans to hold rates

near record lows even as it begins to pare bond purchases, in an

effort to stem any dramatic yield rise that could otherwise

threaten the economic recovery.

But the drop in the unemployment rate brought it closer to

the 6.5 percent level that Fed officials have said would trigger

discussions over when to raise interest rates from their current

levels near zero.

Some economists think the central bank will lower that

threshold to convince markets that any rate hike is a long way

off.

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