Bonds flat as investors wait for Fed decision

By Chris Reese

NEW YORK (Reuters) - U.S. Treasury debt prices were little changed on Wednesday as early price momentum on data showing weak consumer spending and business investment was later sapped by surging stocks.

Investors were also wary of radically shifting bond prices ahead of expectations the Federal Reserve will cut interest rates by 25 basis points on Wednesday afternoon, although many also expect the central bank may signal a pause in the recent monetary loosening campaign.

An initial report on first-quarter U.S. gross domestic product was stronger than expected, rising at a 0.6 percent annual rate, which was equal to fourth-quarter growth and above economists' expectations for a 0.2 percent rise.

Investors focused on details within the report however, including first-quarter consumer spending that was the weakest since the second quarter of 2001, when the economy was last in recession.

Business investment also posted its biggest drop since the first quarter of 2004, while the drop in housing investment was the largest since the fourth quarter of 1981.

"Nothing in this morning's economic reports changes our view of an economy mired in recession," said Scott Anderson, senior economist at Wells Fargo Economics in Minneapolis.

While bonds traded higher after the GDP data, a late-morning surge in stocks knocked debt prices back to near-level, with the benchmark 10-year Treasury note trading 1/32 higher in price for a yield of 3.82 percent from 3.82 percent late on Tuesday.

The 2-year Treasury note was trading flat in price for a yield of 2.38 percent.

"The market is arguing that the economy has been hit by a lot of body blows, but still managed to grow in the first quarter," said Cary Leahey, economist at Decision Economics in New York, adding "this is consistent with the market's view that this recession, despite all the fundamental negatives, could be short and shallow."

Traders are looking ahead to Wednesday afternoon when the Fed will make its interest rate decision and release its latest policy statement at the conclusion of a two-day policy meeting.

Earlier in the day, bonds shed some gains after the ADP National Employment Report showed a surprise increase in private sector jobs in April, casting some doubts on forecasts for a big drop in April data on U.S. nonfarm payrolls on Friday.

The stock market added to gains after ADP, with equities investors taking the report as a sign of strength in the labor market. ADP Employer Services said U.S. private employers added 10,000 jobs in April, well above economists' median expectation for a drop of 60,000.

Economists on average are forecasting April non-farm payrolls to have fallen by 80,000 when the data are released on Friday, which would be on par with an 80,000 dip in March.

Bonds also largely shrugged off a report on Wednesday morning showing business activity in the U.S. Midwest contracted in April for the third straight month, although at a slightly less weak level than expected.

(Additional reporting by Ellen Freilich; Editing by Tom Hals)