By Deborah Levine, MarketWatch NEW YORK (MarketWatch) -- Treasury prices dropped on Friday, pushing yields to their highest in almost two months, after a government report said that last month the U.S. economy lost the fewest jobs since August and the unemployment rate unexpectedly declined. The data added to evidence that the worst of the recession has past and encouraged investors to seek assets that are riskier than Treasurys. "Today's report marks another point of progress back towards normalcy," said Scot Johnson, senior client portfolio manager at Invesco Worldwide Fixed Income. "Riskier assets are performing better so investors will require higher yields on Treasurys." Yields on 10-year notes (UST10Y 3.87, +0.12, +3.17%) rose 12 basis points, or 0.12 percentage point, to 3.87%, the highest on a closing basis since June 10, which was the highest this year. Two-year-note yields (UST2YR 1.32, +0.12, +10.19%) increased 11 basis points to 1.32%, also reaching the highest since early June. The Labor Department said the U.S. economy lost 247,000 jobs in July and the unemployment rate declined to 9.4% from 9.5% in June. See more on jobs report. Economists surveyed by MarketWatch predicted payrolls would fall by 275,000 and they expected a 9.7% unemployment rate. Also, payrolls for May and June were revised to reflect less negative numbers. "The case that the recession ended in June continues to grow with this report," said analysts at RDQ Economics. In other signs of increased appetite among investors for risk, the Standard & Poor's 500 Index (SPX 1,014, +17.12, +1.72%) rose 1.7%. See Market Snapshot. Also, the Japanese yen fell versus the dollar. See Currencies. Interest-rate futures on Friday indicated a slightly higher chance that the Federal Reserve will raise its target overnight borrowing cost for banks, known as the federal-funds rate, as soon as the end of this year. Federal-funds futures for December show traders are betting the rate will rise to 0.3 percentage point by December, from a current range of zero to 0.25 point. The Fed typically changes rates in 0.25-point increments. Futures for April show traders expect the benchmark rate to be about 0.75 percent by then. Most analysts and economists don't see the Fed hiking rates until next summer. "This is market sentiment getting ahead of itself," said Kevin Flanagan, fixed-income strategist at Morgan Stanley Global Wealth Management. "We think the more likely timeframe to start raising rates is mid-2010." "A quarter of a million people losing their jobs is not good news," he said.

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