(Bloomberg) -- Short-dated Treasuries gained on Friday after a US labor-market report emboldened traders to bet that the Federal Reserve will cut interest rates as soon as June.

Two-year yields, more sensitive than longer-maturity debt to Fed policy expectations, fell nearly 10 basis points at one stage to the lowest level in a month before erasing about half of the drop. While February job creation topped estimates, a large downward revision to January’s figure and a jump in the unemployment rate were more influential. The benchmark 10-year note’s yield was little changed after falling nearly five basis points.

Swap contracts that predict the Fed’s decisions repriced to lower rate levels, implying traders expect close to 100 basis points of Fed easing by year-end, with a June cut almost fully priced in. Last month, these contracts briefly priced in less than 75 basis points of easing this year, down from more than 150 basis points seen early in 2024.

Nonfarm payrolls rose 275,000 last month following a combined 167,000 downward revision to the prior two months. Meanwhile the US jobless rate climbed to 3.9% — a two-year high.

“Bond investors were bracing for another experience like last month,” when job creation exceeded even the highest of nearly 80 economist estimates in Bloomberg’s survey, said Bryce Doty, senior portfolio manager at Sit Investment Advisors. “To see the massive revision downward was a huge relief.”

Robust job creation and wage growth are some of the reasons why the Fed has been keeping rates elevated. And signs that the cooling inflation trend was stalling had led traders to pare back bets on aggressive Fed easing over the past two months, sending US government bond yields to their highest levels of the year last month. 

More recently, through, weakness in the ISM manufacturing and services indexes for February suggested that high rates may finally be impacting economic performance, even as the US stock market remains at all-time highs.

Treasury yields declined further this week as Fed Chair Jerome Powell delivered a message traders perceived as dovish during two days of testimony on Capitol Hill. On Thursday, he said the central bank is getting close to having the confidence it needs to start lowering rates.

Policymakers in December anticipated three quarter-point rate cuts this year, on average, though traders last month began to contemplate the possibility that the new quarterly forecasts in March will be less dovish. 

Read more: Powell Says Fed ‘Not Far’ From Confidence Needed to Cut Rates

Selling of Treasuries at Friday’s highs was in keeping with the findings of a BMO Capital Markets survey Thursday. It found that traders were biased toward selling into any strength resulting from the jobs data. The five-year note’s yield rebounded to around 4.04% after dipping below 4% for the first time since Feb. 7.

Also, next week’s Treasury auction schedule — which includes 10- and 30-year debt sales after Monday’s three-year note auction — helps explain supply-related weakness in those parts of the market.

Next week also brings consumer price index readings for February, to be released on March 12. January increases that were larger than anticipated ignited the Treasury selloff that pushed yields to their highest levels since November or December. 

The dollar fell on the data, and equities were modestly higher.

“Last month’s NFP revision is telling, for sure, and the downward revision is much more in line with expectations,” and that drove the dollar lower, said Helen Given, a foreign-exchange trader at Monex. But “pricing in a rate cut in June is a bit overzealous. We saw markets get very ahead of themselves.”

--With assistance from Anya Andrianova and Edward Bolingbroke.

(Adds investor comment and upcoming February inflation report and updates yield levels.)

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