Treasury Closing Summary (May 4):

Payrolls Friday revealed a sub-par 115k gain in April, but accompanied by net upward revisions for Mar and Fed that nearly brought the headline shortfall back to median forecasts. In addition, the tricky unemployment rate dipped to 8.1%, but bond yields only bought the upside headfake for a few minutes before reversing lower with stocks. Though neither weak nor strong enough to tip the Fed's hand on QE3, with the weekend fast-approaching and elections in Europe, risk aversion reared its persistent head again.

U.S. nonfarm payrolls increased only 115k in April but from an upwardly revised 154k in March (was 120k) and a 259k February gain (revised from 240k). The unemployment rate declined to 8.1% from 8.2%. Average hourly earnings were unchanged after a 0.2% March increase. The average workweek was steady at 34.5. For some details, household employment fell 169k, while the civilian labor force fell 342k, hence nudging the unemployment rate lower (participation rate fell to 63.6%, lowest since 1981 -- not good news). Private payrolls increased 130k, with employment in the goods producing sector up 14k, manufacturing up 16k, and construction down 2k. The service producing sector added 116k jobs. Government shed 15k. See our full employment report.

Equities continued to deteriorate as investors were on balance disheartened by the jobs data, with skeptics taking aim at the labor force participation rate, increase in part-time work at the expense of full time jobs and other depressing markers. There was also some talk that swings on S&P 500 e-mini contracts in the minutes before the payrolls release was due to a leak. Also foreboding ahead of Sunday's elections in Greece and France has sent the Euro Stoxx 50 over 1.6% lower. This negatively reinforced the tone on U.S. indices, with the Dow about 1.25% lower and NASDAQ down over 2.0% at one stage. The T-note likewise tested the pivotal 1.89% area, amid heightened risk aversion.

The 2-year yield nosed up to 0.27% on the headlines, then eased below 0.26%. The 10-year yield bounced from the 1.93% area to test 1.95% before stalling again and finished under 1.88%. The 2s-10s spread plunged 5 bp to +162 bp. There are several cross currents on the near horizon that will tug yields both north and south. Uncertainty over the weekend elections in France and Greece should keep a risk-off bid in bonds for now, as should the general anxiety over the slowing in global growth. Fed Twist operations will also support. But the advent of supply with next week's $72 bln refunding auctions should counter somewhat. There will be considerable debate ahead whether the data will alter the Fed's thoughts on QE. We doubt they were weak enough to necessitate more stimulus, but the trajectory of the economic reports heading into the June 19, 20 FOMC will be important.

In options, a very bullish "call" purchase was reported, buying 7.5k in Aug 134 "calls" vs 10-year futures -- a strike that implied a cash yield near 1.56% vs 1.87% presently. This contrasts with a build-up in shorts on Sep 134 "calls" with open interest over 27k. Otherwise, there were a variety of 1-2k deals that rounded out the package. Jun 10s were 16-ticks higher late near 132-22, right on top of the upper end of the 132-22+ to 131-31+ range. For more, see Accutic (subscription).

Fed dove Williams said a rate hike was"still far off," but was hopeful the recovery would prove self-sustaining. NYMEX crude extended its plunge sub-$100 on demand fears, fund liquidation and broad commodity rout. NY Fed Op-Twist:sold $8.64 bln shorter-dated notes from Aug 2012-Feb 2013. European markets were shaken by eurozone PMI shock and fretful into election risk looming in Greece and France Sunday. The USD index rose 0.35% to 79.50 area.

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