February 5, 2014 / 8:11 PM / 4 years ago

TREASURIES-Yields up on payrolls speculation, T-bills hurt by debt ceiling

* Yields rise as ADP close to expectations
    * Fed buys TIPS, notes in two operations
    * Fed to buy $1 bln-$1.25 bln bonds due 2036-2043 on
    * One-month T-bill yields rise on debt ceiling fears

    By Karen Brettell
    NEW YORK, Feb 5 (Reuters) - U.S. Treasuries yields rose on
Wednesday on caution before Friday's highly anticipated payrolls
number, which could pause a rally that has sent yields to their
lowest levels since early November, if jobs growth comes in
    U.S. private employers added 175,000 jobs in January, the
ADP National Employment Report showed on Wednesday, close to
analysts expectations. That raised some hopes that Friday's jobs
gains will also show solid growth. Economists surveyed by
Reuters expect that Friday's jobs data will show that employers
added 185,000 jobs in January. 
    Friday's report is under close attention after weakness in
some recent data raised fears over the strength of the U.S.
recovery. At the same time, investors have poured out of
emerging market assets and stocks, pushing Treasuries yields to
three-month lows.
    "There is a bit of pent-up selling pressure. There has been
nothing but rallies over the last few weeks and I think this is
the result of people looking forward to non-farm payrolls," said
Aaron Kohli, an interest rate strategist at BNP Paribas in New
York. He added that "rates have baked in a lot of negativity."
    Benchmark 10-year Treasuries yields were last
2.67 percent, after falling from more than 3 percent at the
beginning of the year.
    The yields fell as low as 2.57 percent on Monday, the lowest
since November 1.
    The yield decline "is a huge move in that short a time,
since the underlying economic fundamentals haven't deteriorated
that much. The buying definitely got a bit overheated," said Guy
LeBas, chief fixed income strategist at Janney Montgomery Scott
in Philadelphia. 
    The 10-year notes have struggled to stay below 2.60 percent
as investors who expect yields could increase if Friday's
employment data is strong are reticent to buy at the lower
    "I think that most participants are looking for a stronger
number, mainly so they can buy at higher yields," said Thomas di
Galoma, co-head of fixed-income rates at ED&F Man Capital in New
    Treasuries extended losses on Wednesday after the Institute
for Supply Management said its services index rose to 54 last
month from 53 in December, and firms added workers at the
fastest clip in more than three years. 
    Some weakening economic data has increased speculation that
the Federal Reserve may slow or cease reductions in its bond
purchase program if the economy worsens, though many see data as
needing to weaken considerably from current levels to alter the
Fed's plans.
    The Fed last week cut its monthly bond purchases by $10
billion, to $65 billion.
    Atlanta Fed President Dennis Lockhart said on Wednesday the
U.S. central bank will probably keep steadily dialing back asset
purchases and wind them down completely by late 2014. Hawkish
Charles Plosser, of the Philadelphia Fed, went a step further
and said the Fed should wind down purchases faster and end them
before mid-year. 
    The Fed bought $0.97 billion in Treasuries
Inflation-Protected Securities (TIPS) due from 2040 to 2043 and
$2.58 billion in Treasury notes due 2019 to 2021 on Wednesday. 
    It will buy between $1.00 billion and $1.25 billion in bonds
due 2036 to 2043 on Thursday as part of its ongoing purchases.
    Treasuries bill yields, meanwhile, continued to rise on
Wednesday as investors were wary of buying debt that is exposed
to default as the U.S. bumps up again against its debt ceiling.
    Washington is due to reinstate a limit on its borrowing at
the end of this week and Treasury Secretary Jack Lew has said
the administration could use accounting measures to stay under
the new cap until the end of February.
    Yields on the on-the-run one-month Treasuries bills that
come due on March 6 rose to 12 basis points on
Tuesday, the highest since October, when the debt ceiling was
last an issue.
    The U.S. Treasury also said on Wednesday it will sell $70
billion in new coupon-bearing debt next week, but that it may
cut auction sizes at its next quarterly refunding because of a
faster-than-expected narrowing of the nation's budget deficit.
    Next week's sales will include $30 billion in three-year
notes, $24 billion in 10-year notes and $16 billion in 30-year
bonds. The Treasury added that reopening sized for future
auctions of the government's new two-year floating rate notes
are likely to be between $12 billion and $15 billion.

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