* Benchmark yields hover at 3 pct in advance of jobs data
* TIPS breakevens widest since May on improved outlook
* Trading choppy on wavering perception on Europe
* Treasury to sell $66 bln in coupon supply next week
(Updates market action, adds new quotes, changes byline)
By Richard Leong
NEW YORK, Dec 2 U.S. Treasury debt prices fell
on Thursday with benchmark yields hovering at 3 percent for a
second day as traders braced for another solid jobs report on
An improving U.S. economic outlook siphoned money into
stocks and risky assets from bonds for a second straight day.
Some traders also hedged against the case that payrolls could
have increased in November by more than the median forecast of
140,000 among economists recently polled by Reuters.
"The market is recalibrating itself for a higher level of
growth," said Mark Pawlak, market strategist at Keefe, Bruyette
& Woods in New York.
Anticipation of stronger economic growth, together with
higher oil prices, resulted in Treasury Inflation-Protected
Securities' better performance versus their nominal or regular
counterparts. The yield gap between 10-year TIPS and 10-year
nominals -- a gauge of long-term inflation expectations -- grew
to 2.21 percent, the widest since mid-May.
This rethinking of the economy was mitigated by wavering
confidence in Europe's response to its fiscal predicament. It
helped avert a sell-off like one on Wednesday when the 10-year
yield posted its second largest one-day spike so far in 2010.
Bond prices briefly turned positive after comments from
European Central Bank President Jean-Claude Trichet
disappointed those traders who bet the ECB would buy government
debt, like the U.S. Federal Reserve, in a bid to stabilize the
region. The view of a reserved ECB was offset by talk of it
buying Portuguese and Irish debt in the open market. See
"People want them (ECB policy-makers) to act like the Fed,
but they are not. It is disappointing in a sense, but it is not
surprising," said Keefe Bruyette's Pawlak.
Benchmark 10-year note prices US10YT=RR fell 9/32 in late
trading for a yield of 3.00 percent after touching 3.03
percent, its highest since late July. Analysts see the 10-year
yield will probe technical support at 3.05 percent, then 3.10
percent if it rises further.
Separately, the U.S. Treasury Department said it will sell
a combined $66 billion in three-year, 10-year and 30-year debt
next week. For more, see [ID:nWAL2NE6U2]
The fate of the Fed's $600 billion bond purchase program,
dubbed QE2, remains a point of debate among investors and even
policy-makers. Critics of QE2 said more bond purchases could
lead to a surge in inflation and damage the dollar.
A pair of Fed officials said on Thursday the second bout of
quantitative easing that began in November is subject to
regular review and the central bank may have not to buy all
$600 billion. [ID:nN02241796]
St. Louis Fed President James Bullard, who is a voting
member of the Federal Open Market Committee this year, said he
had not supported setting the $600 billion figure in advance.
"That spooked some people in the market," said Suvrat
Prakash, interest rate strategist at BNP Paribas in New York.
"It raises concerns it won't go through with the program."
Traders had bet on Fed's commitment to buy this total
amount of Treasuries through mid-2011. On Thursday, it
purchased $8.3 billion in government debt due in Feb. 2018 to
Aug. 2010. For more, see [ID:nN20EDTABL]
Some investors said QE2 is helping the economy even though
bond yields have been rising since it started in mid-November.
"This round of quantitative easing will help support growth
over the next couple of quarters," said Ray Humphrey, senior
portfolio manager at Hartford Investment Management Co. in
Humphrey, who helps manage the Hartford Inflation Plus Fund
(HIPAX.O), recommends investors to consider moving money into
TIPS. "There is inflation coming," he said.
(Additional reporting Karen Brettell; Editing by Andrew Hay)