* U.S. payrolls grow 175,000 in May, above median forecast
* Some see Fed buying fewer bonds starting in September
* Ten-year yield rises for a sixth straight week
* Repo rate on 10-year notes stuck in negative territory
By Richard Leong
NEW YORK, June 7 U.S. Treasury debt prices fell
on Friday as investors revived bets that the Federal Reserve
could slow its massive bond-buying program later this year after
data showed solid if not exceptional employment growth.
The yield on the benchmark 10-year note rose for a sixth
straight week, the first such gain since late March to early May
2009 when the U.S. economy was bleeding hundreds of thousands of
jobs a month during the depths of the recession.
U.S. payrolls rose by 175,000 in May, Labor Department data
showed on Friday, more than the 170,000 expected in a Reuters
poll but still not enough to suggest an immediate Fed exit from
its buying of $85 billion per month in Treasuries and
Still, analysts said the number was strong enough that a
slowdown in Fed buying could be on tap in coming months as the
economy proves resilient enough to stand without this support.
"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, said in New York after the jobs data.
But at least one Fed official made clear that he thinks the
central bank should already hit the brakes.
Philadelphia Fed President Charles Plosser, a longtime
critic of the Fed's quantitative easing program, told Reuters
Friday's jobs report showed that government spending cuts have
not so far been as damaging as some had feared.
Still, at 7.6 percent, the U.S. unemployment rate remains
above the 6.5 percent the Fed would like to see. And with
economic growth sluggish - 2.4 percent in the first quarter -
some economists still see a place for the current level of Fed
Fed policymakers next meet on June 18-19.
In the meantime, the selling in Treasuries was compounded by
investors closing Treasuries hedges on their mortgage-backed
Any reduction in the U.S. 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.
A rally in stocks stemming from the May jobs data
also reduced the allure of low-yielding government bonds.
Disappointing jobs readings from ADP and the Institute for
Supply Management this week had made some traders curb
expectations for the May payroll reading, rekindling bids for
Treasuries in the two previous trading sessions.
Despite the market selloff on Friday, the 10-year Treasury
yield held below the 13-month-plus highs set last week, and was
still far less than the 4 percent level prior to the Fed's first
round of QE back in late 2008.
U.S. benchmark 10-year Treasury notes last
traded 27/32 lower in price with a yield of 2.175 percent, from
2.079 percent late on Thursday.
The 30-year bond was down 1-23/32 in price,
yielding 3.336 percent, from 3.24 percent late on Thursday.
In MBS trading, the yield on 30-year, 3.0-percent coupon
mortgage bonds guaranteed by Fannie Mae was up to
about 2.97 percent from 2.84 percent on Thursday.
REPO "SPECIAL" PERSISTS
In money markets, the supply of 10-year notes remained
scarce or "special" in the repurchase agreement (repo) sector,
keeping the overnight borrowing costs to lend them in negative
This meant investors pay Wall Street dealers and other
holders of the 10-year notes to own them instead of the other
way around during normal conditions when there is adequate
supply of this maturity.
Ten-year repos for over-the-weekend traded at minus 2.75
percentage points early Friday, compared with minus 3.10 percent
late on Thursday.
The repo "specialness" of 10-year notes has been driven by
heavy demand from money market funds and cash investors after a
drop in supply of Treasury bills in April. Analysts said the
scarcity of 10-year Treasuries will gradually ease after the
government sells $21 billion of 10-year supply next week.