By Sam Goldfarb

U.S. government bonds strengthened Thursday, as traders reacted to soft private-sector employment data and adopted a cautious stance ahead of Friday's more significant jobs report.

In recent trading, the yield on the benchmark 10-year Treasury note was 2.401%, according to Tradeweb, compared with 2.452% on Wednesday.

Yields fall as bond prices rise.

Bond prices climbed overnight as investors focused on aspects of the Fed minutes released Wednesday that reinforced expectations that the central bank will take a cautious approach to raising interest rates. Those included uncertainty over the impact of President-elect Donald Trump'sfiscal policies and concern that the strengthening dollar could make it harder for inflation to reach the Fed's 2% target.

Yields then drifted back higher only to decline again when a new report on private-sector hiring fell below expectations, creating some pessimism ahead of Friday's employment report from the Labor Department.

Higher interest rates from the Fed tend to shrink the value of outstanding bonds, especially those with shorter maturities.

"To a large degree what's happening is just a wait-and-see mode ahead of Friday's nonfarm payroll report," said John Canavan, market analyst at Stone and McCarthy Research Associates.

Bond yields have risen after falling to record lows during the summer, reflecting better economic data, signs of rising inflation and expectations that Mr. Trump and a Republican-controlled Congress will increase the budget deficit by cutting taxes and increasing spending on defense and infrastructure.

A more expansive fiscal policy could diminish the value of outstanding government debt by adding to the supply of bonds. It could also spur growth and inflation, which would erode the fixed returns of bonds and possibly lead the Federal Reserve to quicken its pace of interest-rate increases

The Fed raised short-term interest rates in December for the second time in a decade and projected three rate increases this year. Its next meeting is scheduled for Jan. 31 and Feb. 1.

Interest-rate-derivative markets show that investors expect the Fed to raise rates twice this year, beginning at the end of spring.

Fed funds futures, a popular derivative market for investors and traders to place bets on the Fed's rate-policy outlook, showed Thursday a 64% probability of the Fed raising interest rates by its June meeting, according to CME Group. The odds of the Fed raising rates at least three times, or three quarters of a percentage point, by December were 34%.

Write to Sam Goldfarb at sam.goldfarb@wsj.com

(END) Dow Jones Newswires

January 05, 2017 11:06 ET (16:06 GMT)

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