TREASURIES-Yields up on payrolls speculation, T-bills hurt by debt ceiling
* Yields rise as ADP close to expectations * Fed buys TIPS, notes in two operations * Fed to buy $1 bln-$1.25 bln bonds due 2036-2043 on Thursday * One-month T-bill yields rise on debt ceiling fears By Karen Brettell NEW YORK, Feb 5 (Reuters) - U.S. Treasuries yields rose on Wednesday on caution before Friday's highly anticipated payrolls number, which could pause a rally that has sent yields to their lowest levels since early November, if jobs growth comes in strong. U.S. private employers added 175,000 jobs in January, the ADP National Employment Report showed on Wednesday, close to analysts expectations. That raised some hopes that Friday's jobs gains will also show solid growth. Economists surveyed by Reuters expect that Friday's jobs data will show that employers added 185,000 jobs in January. Friday's report is under close attention after weakness in some recent data raised fears over the strength of the U.S. recovery. At the same time, investors have poured out of emerging market assets and stocks, pushing Treasuries yields to three-month lows. "There is a bit of pent-up selling pressure. There has been nothing but rallies over the last few weeks and I think this is the result of people looking forward to non-farm payrolls," said Aaron Kohli, an interest rate strategist at BNP Paribas in New York. He added that "rates have baked in a lot of negativity." Benchmark 10-year Treasuries yields were last 2.67 percent, after falling from more than 3 percent at the beginning of the year. The yields fell as low as 2.57 percent on Monday, the lowest since November 1. The yield decline "is a huge move in that short a time, since the underlying economic fundamentals haven't deteriorated that much. The buying definitely got a bit overheated," said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott in Philadelphia. The 10-year notes have struggled to stay below 2.60 percent as investors who expect yields could increase if Friday's employment data is strong are reticent to buy at the lower yields. "I think that most participants are looking for a stronger number, mainly so they can buy at higher yields," said Thomas di Galoma, co-head of fixed-income rates at ED&F Man Capital in New York. Treasuries extended losses on Wednesday after the Institute for Supply Management said its services index rose to 54 last month from 53 in December, and firms added workers at the fastest clip in more than three years. Some weakening economic data has increased speculation that the Federal Reserve may slow or cease reductions in its bond purchase program if the economy worsens, though many see data as needing to weaken considerably from current levels to alter the Fed's plans. The Fed last week cut its monthly bond purchases by $10 billion, to $65 billion. Atlanta Fed President Dennis Lockhart said on Wednesday the U.S. central bank will probably keep steadily dialing back asset purchases and wind them down completely by late 2014. Hawkish Charles Plosser, of the Philadelphia Fed, went a step further and said the Fed should wind down purchases faster and end them before mid-year. The Fed bought $0.97 billion in Treasuries Inflation-Protected Securities (TIPS) due from 2040 to 2043 and $2.58 billion in Treasury notes due 2019 to 2021 on Wednesday. It will buy between $1.00 billion and $1.25 billion in bonds due 2036 to 2043 on Thursday as part of its ongoing purchases. Treasuries bill yields, meanwhile, continued to rise on Wednesday as investors were wary of buying debt that is exposed to default as the U.S. bumps up again against its debt ceiling. Washington is due to reinstate a limit on its borrowing at the end of this week and Treasury Secretary Jack Lew has said the administration could use accounting measures to stay under the new cap until the end of February. Yields on the on-the-run one-month Treasuries bills that come due on March 6 rose to 12 basis points on Tuesday, the highest since October, when the debt ceiling was last an issue. The U.S. Treasury also said on Wednesday it will sell $70 billion in new coupon-bearing debt next week, but that it may cut auction sizes at its next quarterly refunding because of a faster-than-expected narrowing of the nation's budget deficit. Next week's sales will include $30 billion in three-year notes, $24 billion in 10-year notes and $16 billion in 30-year bonds. The Treasury added that reopening sized for future auctions of the government's new two-year floating rate notes are likely to be between $12 billion and $15 billion.
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