TREASURIES-Climb in Asia before ADP employment report
TOKYO, March 5 (Reuters) - U.S. Treasuries climbed on Wednesday as investors awaited reports on private-sector employment and services activity later in the day for clues on how deeply the Federal Reserve will cut interest rates.
The gains pushed the yield on two-year notes back towards a four-year low near 1.50 percent hit in Tuesday's volatile session as investors expect aggressive monetary easing.
Worries about financial institution losses from turmoil in global credit markets is likely to continue to support two-year notes, said Yasutoshi Nagai, chief economist for Daiwa Securities SMBC's fixed-income, currency and commodities research department.
"Fed officials in Washington sound pretty pessimistic and I think that will prompt market players to think that such problems will not be resolved very soon," Nagai said.
Fed Governor Frederic Mishkin said on Tuesday that signs of sluggish consumer and business spending and the potential for a deeper housing downturn and credit contraction pose serious risks to the U.S. economic outlook. [ID:nWBT008528]
Two-year yields could dip back towards 1.5 percent if the private-sector ADP national employment report due later on Wednesday and the government's jobs data to be released on Friday are weak, Nagai said.
Two-year notes rose 3/32 in price to yield 1.627 percent US2YT=RR, down 4 basis points from late U.S. trade but holding above the four-year low of 1.503 percent hit on Tuesday.
Reflecting ongoing strains in the banking system and credit markets, the two-year U.S. swap spread was 99 basis points USD2YTS=RR, widening back near record levels hit late last year.
ADP'S EMPLOYMENT REPORT
The benchmark 10-year note rose 8/32 in price to yield 3.598 percent US10YT=RR, down roughly 3 basis points.
Expectations of more Fed rate cuts and fears of higher inflation on the horizon have caused the yield curve to steepen.
The spread of the 10-year yield over the two-year yield stood at around 197 basis points. On Tuesday the spread briefly widened to 200 basis points, the most since 2004.
Treasuries see-sawed on Tuesday, having risen as the Dow Jones industrial average .DJI fell over 1 percent, but falling later in the day after CNBC television reported that bond insurer Ambac Financial Group was progressing toward a deal to raise capital but had not yet reached an agreement.
Later on Wednesday, Cleveland Fed President Sandra Pianalto is scheduled to speak about the economy and monetary policy, and the February service sector report from the Institute for Supply Management will also be scrutinised.
The ADP national employment report due later on Wednesday is expected to show a rise of 20,000 private-sector jobs in February, according to the median market forecast in a Reuters survey, down sharply from a rise of 130,000 the previous month. Continued...
