June 5, 2014 / 6:46 PM / 3 years ago

TREASURIES-Prices gain after ECB rate cuts, before U.S. payrolls data

(Updates prices)
    * Prices rise after ECB cuts rates, adds more stimulus
    * U.S. May employment data in focus for Friday
    * Fed buys $2.51 bln notes due 2022-2024

    By Karen Brettell
    NEW YORK, June 5 (Reuters) - U.S. Treasuries prices gained
on Thursday after the European Central Bank cut interest rates
to record lows and announced new measures meant to help
stimulate the region's economy.
    The ECB said it was setting a negative deposit rate,
effectively charging banks to deposit overnight. The move,
without precedent in ECB history, came in response to a slowdown
in inflation, to far below the central bank's target, amid weak
euro zone lending. 
    The ECB said it will offer banks a targeted long-term
refinancing operation (LTRO) to stimulate lending. The bank also
said it was preparing to purchase asset-backed securities and
will discontinue sterilizing previous bond purchases. 
    Treasuries weakened temporarily after the announcement, in
line with German government bonds, before then paring losses to
trade little changed.
    "A lot of the details from the ECB's announcement still have
to be hashed out," said Aaron Kohli, an interest rate strategist
at BNP Paribas in New York. "There's a negative deposit rate
that everyone is focused on, but also ABS purchases. It's not
clear what the details are."
    Benchmark 10-year notes were last up 7/32 in
price to yield 2.58 percent, unchanged from before the ECB's
    Treasuries prices had gained before the ECB announcement on
strong overnight demand for U.S. bonds from Japanese investors,
said traders.
    Bonds gained some support from investors that saw the ECB's
actions as further evidence that central banks will continue to
keep monetary conditions loose. 
    "It delivered the notion global central banks are committed
to aggressive policies to avert deflation in the foreseeable
future," said Kathy Jones, a fixed income strategist at Charles
Schwab in New York.
    Bonds have defied expectations this year that they would
weaken, as economic growth has disappointed and central banks
globally have been more dovish than many expected.
    The next major focus for the market will be Friday's
payrolls report for May. It is expected to show that employers
added 218,000 to payrolls, according to the median estimate of
105 economists polled by Reuters. 
    Many investors have closed out short positions in the past
week to be neutral, which may mitigate volatility on Friday
unless the number is a big surprise.
    The Federal Reserve also reduced some of its reliance on the
jobs data when it removed at its March meeting a threshold to
increase interest rates when the unemployment rate hits 6.5
    "By removing the hard employment target they have
essentially made it one more indicator. Its very hard for the
market to know if any print is going to change their opinion,"
said Kohli.
    The Fed bought $2.51 billion in notes due from 2022 to 2024
on Thursday as part of its ongoing purchase program.

 (Additional reporting by Richard Leong, Editing by W Simon, Tom
Brown and Meredith Mazzilli)

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