REFILE-TREASURIES-Prices fall as jobless rate improves, new supply due

Fri Oct 5, 2012 4:35pm EDT

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By Karen Brettell
    NEW YORK, Oct 5 (Reuters) - U.S. Treasuries prices fell on
Friday as an unexpected drop in the U.S. jobless rate helped
boost expectations for an improving economy and as dealers
prepared for new long-dated debt sales next week.
    The U.S. Labor Department said the unemployment rate fell to
a four-year low of 7.8 percent in September, down from 8.1
percent in August, as 114,000 jobs were added. 
    "The big shock was the drop in the rate, the consensus
number was right in line," said Sean Murphy, a Treasuries trader
at Societe Generale in New York.
    Treasuries sold off as investors saw the data as signaling
an improving economy, if still tepid growth.
    "Given that the data has been a little bit better than
expectations over the course of the week we are probably sitting
a little bit rich," said Murphy.
    Benchmark 10-year notes fell 20/32 in price to
yield 1.74 percent, the highest level since Sept. 24.
    Thirty-year bonds dropped 1-20/32 in price to
yield 2.97 percent, just above the debt's 200-day moving average
and the highest level since Sept. 21.
    The long bonds' yields are now seen approaching the 3
percent level, where they traded before the Fed announced its
third round of easing on Sept. 13, as dealers prepare for a new
supply next week.
    "There is no incentive for a dealer to step up and take
paper in front of next week's supply," said Chris Ahrens, an
interest rate strategist at UBS in Stamford, Connecticut.
    The sales will also occur in a U.S. holiday-shortened week,
with bond markets closed on Monday for the Columbus Day.
    Treasuries also weakened after a report that the European
Central Bank envisions buying large volumes of sovereign bonds
helped Spanish debt spreads rally and reduced demand for safe
haven bonds.
    "In Europe, the peripheral spreads came crashing in today.
All these factors weigh on Treasuries at these low levels of
rates," said Ahrens.
    The ECB may buy large volumes of sovereign bonds for a
period of one to two months once its program of "Outright
Monetary Transactions" is launched, but would then suspend
purchases during an assessment period, senior central bank
sources told Reuters. 
    The Federal Reserve sold $7.802 billion in U.S. Treasury
coupons on Friday maturing from February 2013 to February 2014
as part of its "Operation Twist" stimulus program that extends
the average maturity of the central bank's Treasury holdings in
order to lower mortgage rates and other long-term borrowing
costs.
    Some analysts expect the Fed may extend quantitative easing
to Treasuries, from mortgage-backed debt, when Operation Twist
expires at the end of the year.
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