* U.S. payrolls gain of 175,000 above median forecast
* Some see Fed buying fewer bonds starting in September
* Mortgage-related selling adds to Treasuries losses
By Richard Leong
NEW YORK, June 7 U.S. Treasury debt prices slid
on Friday in volatile trading as data that showed mildly
better-than-expected employment growth in May revived bets the
Federal Reserve might pare its bond purchases later this year
and spurred selling in bonds.
The latest U.S. payrolls gain of 175,000, while below the
top end of economists' forecasts of above 200,000, was high
enough to feed speculation that Fed policymakers will scale back
their $85 billion monthly purchases of Treasuries and
mortgage-backed securities later this year.
The May jobs report was seen as critical evidence for the
U.S. central bank's June 18-19 policy meeting where policymakers
will likely further discuss the approach to reduce its asset
purchases, which have helped propel Wall Street stock prices to
record highs and supported the housing recovery.
"This is a good report. This puts the Fed tapering theme
back in the market," said Eric Green, global head of rates and
currency research and strategy at TD Securities in New York.
Some traders reckoned the Fed might signal a reduction in
bond purchases in the third quarter.
"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 some economists think that the sluggish pace of economic
growth, which came it at 2.4 percent in the first quarter, and
relatively high unemployment, which edged up to 7.6 percent in
May, still require the current level of Fed accommodation.
In the meantime, the selling in Treasuries was compounded by
investors closing Treasuries hedges on their MBS holdings.
Any reduction in the 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.
Since the release of the May payrolls report, trading volume
on the open market jumped as prices gyrated wildly and traders
scrambled to cover short positions.
Disappointing jobs readings from ADP and the Institute for
Supply Management earlier 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, longer-dated Treasury
yields managed to hold below the 13-month-plus highs set last
U.S. benchmark 10-year Treasury notes last
traded 14/32 lower in price with a yield of 2.134 percent, up
5.5 basis points from late on Thursday.
The 30-year bond was down 1-7/32 in price,
yielding 3.312 percent, up 7.3 basis points from Thursday's
In MBS trading, the yield on 30-year, 3.0-percent coupon
mortgage bonds guaranteed by Fannie Mae was up
nearly 5 basis points at 2.89 percent. Its yield spread to
comparable five-year Treasuries widened to 1.84
percentage points from 179 basis points late on Thursday,
according to Reuters data.