U.S. yields rise, but inflation data next week seen key to Fed outlook

U.S. Treasury yields rose on Friday after a surprisingly strong U.S. employment report led investors to increase bets on tighter policy from the Federal Reserve, though they came off their highs as market participants prepared for inflation data next week.

Nonfarm payrolls surged by 162,000 jobs last month, the Bureau of Labor Statistics said, far outpacing expectations of economists polled by Reuters, who had forecast they would increase by 56,000. Adding to the robust picture, a previously reported drop of 23,000 for July was replaced by an upwardly revised 21,000 gain for that month.

The payrolls report caught a market already looking ahead to next week's inflation reports, particularly the core consumer price index (CPI) -- which strips out food and energy prices -- and may tip the balance in favor of more hawkish views in the market, though there is still a relative lack of certainty as to whether this will result in a hike when the Fed meets on September 15 to 16.