By Min Zeng

Fresh signs of wage inflation on Friday failed to spook the U.S. government bond market.

Investors initially sold Treasury bonds after the latest nonfarm jobs report showed the fastest pace of wage gains since June 2009. Inflation is the main threat to long-term bonds.

Yet bond yields ticked lower as buyers stepped in, reflecting ongoing caution ahead of next week's U.S. presidential election. Bond yields have been falling over the past week as investors cut their risk appetites to preserve capital due to uncertainties about the election.

"The inflation number is being overshadowed by election uncertainty," said Daniel Mulholland, head of U.S. Treasury trading at Credit Agricole in New York.

After earlier rising to 1.82%, the yield on the benchmark 10-year Treasury note slipped back down to 1.794%, according to Tradeweb. The yield was 1.811% Thursday. Yields fall as bond prices rise.

Another boost for long-term debt was Friday's jobs report's wage inflation data, which bolstered the case for the Federal Reserve to raise interest rates in December. Investors positioned for this prospect by selling short-term debt and migrating cash into long-term bonds. It is a common asset-allocation strategy for tighter monetary policy as yields on short-term debt are highly sensitive to the central bank's policy outlook.

The two-year note underperformed Friday, with its yield trading at 0.814%, unchanged from Thursday.

The 30-year bond was the best performer benefiting from the allocation away from short-term debt. Its yield fell to 2.575% from 2.602% Thursday.

"The U.S. economy remains pretty healthy and wage pressure reinforces the Fed's plan to raise rates in December," said John Canavan, market analyst at Stone & McCarthy Research Associates in Princeton, New Jersey.

Mr. Canavan said next week's U.S. election result remains a wild card but for now he sticks to his expectation that the Fed would raise rates next month. He expects yields on short-term Treasury debt to rise further from here if the Fed pulls the trigger.

Fed-fund futures, a popular derivative market for hedge funds and money managers to place bets on the Fed's interest-rate policy outlook, at one point priced in a 74% probability of a rate increase by the Fed's Dec. 13-14 policy meeting following the jobs report, according to data from CME. The odds were 72% Thursday.

The Fed said in its interest rate statement Wednesday that the case has "continued to strengthen" for a rate increase before theend of the year. Policy makers decided, for the time being, to wait for some further evidence of continued progress toward its objectives." Economists said this signals that the bar is relatively low for the central bank to act, barring any unexpected shock to financial markets or the economy.

Still, next week's election result could muddle the Fed's tightening plan, analysts say.

Over the past few sessions, trading has become more volatile on the prospect of a tighter race than many had anticipated. On Thursday, the VIX index, or the fear gauge on Wall Street, reached the strongest level since late June, a sign investors are worried about large price fluctuations in U.S. stocks.

Investors have shed their holdings of riskier bets and embraced haven bonds after news reports last Friday that federal investigators have launched a new probe into private emails of Hillary Clinton, the Democratic Party's nominee for president.Some analysts say a win by Republican candidate Donald Trump would likely send bond yields lower in the short term, but in the longer term, bond yields may rise given his leaning toward fiscal stimulus, which would require more issuance of government bonds for funding, and posing a threat to the value of long-term Treasury debt.

Write to Min Zeng at min.zeng@wsj.com

(END) Dow Jones Newswires

November 04, 2016 10:08 ET (14:08 GMT)

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