(Bloomberg News) Treasury notes rose for the first time in four days as U.S. job growth slowed more than forecast, fueling bets the Federal Reserve may start a third round of debt buying next week under the quantitative-easing stimulus tactic.

The benchmark 10-year note reversed earlier losses, paring a weekly decline, as a report showed U.S. employers added 96,000 positions in August, versus a revised 141,000 increase the previous month. Fed Chairman Ben S. Bernanke, who has vowed to hold the key interest rate at virtually zero until late 2014, said last week unemployment was of "grave concern."

"The bottom line is the Fed has a smoking gun now," said Richard Schlanger, who helps invest $20 billion in fixed-income securities as vice president at Pioneer Investments in Boston. "The question is, when are they going to pull the trigger?"

The benchmark 10-year yield declined four basis points, or 0.04 percentage point, to 1.64 percent at 12:57 p.m. in New York. It touched 1.74 percent, the highest level since Aug. 22, before the jobs data. The price of the 1.625 percent note due in August 2022 increased 10/32, or $3.13 per $1,000 face amount, to 99 27/32. The yield has increased 10 basis points this week.

Thirty-year bond yields fell as much as seven basis points to 2.73 percent before trading little changed at 2.79 percent. Because of their long maturity, long bonds are more sensitive to inflation than shorter-term U.S. government securities.

European Program

Treasuries fell yesterday as risk appetite swelled when the European Central Bank announced a program to buy euro-area government bonds to contain the region's debt crisis.

The U.S. jobless rate decreased to 8.1 percent, staying above 8 percent for a 43rd month. Economists in a Bloomberg News survey had forecast the report would show the U.S. added 130,000 jobs, versus a previously announced 163,000 in July, and that the jobless rate remained at 8.3 percent.

"We are seeing modest job growth that isn't sufficient to keep up with population growth," said Jay Mueller, who manages about $3 billion of bonds at Wells Capital Management in Milwaukee. "The weak data makes the Fed more likely to attempt quantitative easing. The central bank in Europe is becoming pretty expansive, and the Fed is getting closer to jumping on that bandwagon."

Fed policy makers are scheduled to meet Sept. 12-13.

The payrolls data came two months before the U.S. presidential election. Employment and the economy are central themes in the campaign, with President Barack Obama and Republican challenger Mitt Romney each trying to convince voters they can best energize the expansion and create jobs.

Political Topic

"It's the No. 1 topic going into the election," said Chris Ahrens, an interest-rate strategist in Stamford, Connecticut, at UBS AG, one of the 21 primary dealers that trade with the Fed. "The sense in the market is that the central banks are on the move and are trying to be as supportive to the economic environment as possible. The bar is low for the Fed to institute another round of asset purchases."

The Fed will give "strong hints" or provide "positive action" at next week's policy meeting, Bill Gross, who runs the world's biggest bond fund at Pacific Investment Management Co. in Newport Beach, California, said in a radio interview on "Bloomberg Surveillance" with Tom Keene and Ken Prewitt. The central bank will likely ease further through "open ended" purchases of Treasuries and mortgages, he said.

The central bank's favored bond-market gauge of inflation expectations, the five-year, five-year forward break-even rate, which shows how much traders anticipate consumer prices will rise during a period of five years starting in 2017, declined to 2.43 percent on Sept. 4, the lowest level since July 26. The average for 2012 is 2.54 percent.

'Nontraditional Policies'

Treasuries climbed on Aug. 31 as Bernanke, speaking at an economics conference in Jackson Hole, Wyoming, said the costs of "nontraditional policies" to spur the economy appeared manageable when considered carefully. He said the Fed stands ready to act if necessary, stoking speculation he'll extend the time frame on the Fed's pledge to hold interest rates at virtually zero until late 2014 or restart bond purchases.

The Fed purchased $2.3 trillion of securities from 2008 to 2011 in two rounds of quantitative easing. It also has kept its benchmark rate at zero to 0.25 percent since December 2008.

"QE is a net negative for Treasuries, if it's large enough to work," said Tom Graff, who manages $3.6 billion of fixed income at Brown Advisory Inc. in Baltimore. "I don't want to be a buyer of Treasuries with QE as an expectation," though given the market reaction to today's data, "that view appears to be a minority," he said.

'Conditional' Purchases

For further easing to be successful, the Fed should make purchases of mortgage-backed securities and Treasuries "unspecified and conditional," focusing on improvements in economic data rather than setting a total amount that it will buy, Graff said.

The Fed sold $7.8 billion of Treasuries today maturing from February 2013 to February 2014 as part of Operation Twist, its program to swap shorter-term securities in its holdings with longer-term debt to put downward pressure on borrowing costs.

The benchmark 10-year Treasury yield is poised for its first weekly increase since the five days ended Aug. 17. Demand for refuge dropped as European Central Bank President Mario Draghi announced yesterday an unlimited bond-purchase program to regain control of interest rates in the euro region and fight speculation of a currency breakup.

The ECB's Outright Monetary Transactions plan will focus on government bonds with maturities of one to three years, Draghi said. The ECB will only intervene in the secondary market if a nation has asked Europe's bailout fund to buy its debt on the primary market, ensuring strict conditions, he said.

The U.S. will auction $66 billion in notes and bonds next week: $32 billion in three-year debt, $21 billion in 10-year securities and $13 billion in 30-year bonds, the Treasury announced yesterday.