TREASURIES-U.S. bonds slide on revived bets of less Fed buying
* U.S. payrolls grow 175,000 in May, above median forecast * Some see Fed buying fewer bonds starting in September * Ten-year yield set for sixth straight weekly rise * Repo rate on 10-year notes stuck in negative territory By Richard Leong NEW YORK, June 7 (Reuters) - U.S. Treasury debt prices slid on Friday as investors revived bets that the Federal Reserve could slow a massive bond buying program later this year after data showed solid if not exceptional employment growth. The yield on the benchmark 10-year note was on track to rise for a sixth straight week - the first such gain since late March to early May 2009, when the U.S. economy was bleeding hundreds of thousands of jobs a month during the depths of the Great Recession. U.S. payrolls rose by 175,000 in May, data showed on Friday, more than the 170,000 expected in a Reuters poll but still not enough to suggest an immediate Fed exit from its buying of $85 billion per month in Treasuries and mortgage-backed securities. Still, analysts said the number was high enough that a Fed slowdown in bond buying could be on tap in coming months as the economy proves resilient enough to stand on its own. "Our expectation would be that you still could have the Fed - starting in and around September - very moderately reduce the scale of their long-term asset purchase program, which generally has been the expectation of the markets," Rick Rieder, co-head of Americas fixed-income at BlackRock, the world's largest asset manager, in New York said during a conference call with reporters after the jobs data. But at least one Fed official made clear that he thinks the central bank should already hit the brakes. Philadelphia Fed President Charles Plosser, a longtime critic of the Fed's quantitative easing program, said Friday's jobs report showed that government spending cuts have so far not been as damaging as some feared. Still, at 7.6 percent, the unemployment rate remains above the 6.5 percent the Fed would like to see. And with growth sluggish - 2.4 percent in the first quarter - some economists still see a place for the current level of Fed accommodation. Fed policymakers next meet on June 18-19. In the meantime, the selling in Treasuries was compounded by investors closing Treasuries hedges on their mortgage-backed securities holdings. Any reduction in the U.S. central bank's third round of quantitative easing, dubbed QE3, will likely increase mortgage rates and slow refinancing, reducing the appeal of mortgage bonds, analysts said. A rally in stocks stemming from the May jobs data also reduced the allure of low-yielding government bonds. Disappointing jobs readings from ADP and the Institute for Supply Management this week caused some traders to curb expectations for the May payroll reading, rekindling bids for Treasuries in the two previous trading sessions. Despite the market selloff on Friday, the 10-year Treasury yield held below the 13-month-plus highs set last week, and was still far less than the 4 percent level prior to the Fed's first round of QE back in late 2008. U.S. benchmark 10-year Treasury notes last traded 21/32 lower in price with a yield of 2.154 percent, from 2.079 percent late on Thursday. The 30-year bond was down 1-11/32 in price, yielding 3.315 percent, from 3.24 percent late on Thursday. In MBS trading, the yield on 30-year, 3.0-percent coupon mortgage bonds guaranteed by Fannie Mae was up to 2.94 percent from 2.84 percent on Thursday. REPO "SPECIAL" PERSISTS In money markets, the supply of 10-year notes remained scarce or "special" in the repurchase agreement (repo) sector, keeping the overnight borrowing costs to lend them in negative territory. This meant investors pay Wall Street dealers and other holders of the 10-year notes to own them instead of the other way around during normal conditions when there is adequate supply of this maturity. Ten-year repos for over-the-weekend traded at minus 2.75 percentage points early Friday, compared with minus 3.10 percent late on Thursday. The repo "specialness" of 10-year notes has been driven by heavy demand from money market funds and cash investors after a drop in supply of Treasury bills in April. Analysts said the scarcity of 10-year Treasuries will gradually ease after the government sells $21 billion of 10-year supply next week.
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