May 6, 2013 / 3:15 PM / 5 years ago

TREASURIES-U.S. bond yields at three-week highs before new supply

* Yields hold at higher levels after payrolls report
    * Treasury to sell $72 bln in new 3, 10, 30-year debt
    * Fed buys $3.31 bln in debt due 2020-2023

    By Karen Brettell
    NEW YORK, May 6 (Reuters) - U.S. Treasuries prices slipped
slightly on Monday as investors continued to digest Friday's
better than expected jobs report, which sent yields surging to
their highest levels in three weeks.
    The U.S. government bonds are expected to stay at the
relatively higher yields as investors prepare for $72 billion in
new supply this week, with the recent selloff also seen as
likely helping demand as investors take advantage of the yield
    Friday's jobs gains caught traders offside, as most were
anticipating a gloomier jobs picture after other economic
releases pointed towards more sluggish growth. 
    "There was a significant amount of buying and short covering
and capitulation around month-end and prior to that number, with
expectations having been lowered substantially going in," said
Dan Mulholland, managing director in Treasuries trading at BNY
Mellon in New York.
    The positive jobs surprise, with employers adding 165,000
jobs in April and the jobless rate falling to 7.5 percent, the
lowest since December 2008, left traders scrambling to cover
long exposures and sent yields surging.
    Benchmark 10-year Treasuries yielded 1.75
percent on Monday, up from 1.74 percent on Friday and up from
1.62 percent before the jobs data was released.
    Thirty-year bonds yielded 2.97 percent on
Monday, up from 2.96 percent late on Friday and up from 2.82
percent before the jobs report.
    Despite Friday's jobs gains, many economic analysts believe
that economic growth is still too slow and investors have pared
back expectations that the Federal Reserve may taper or end bond
purchases this year as inflation also dips.
    That may hold yields down near historic lows for some time
    Data last week showed that the Fed's preferred gauge of
consumer prices, the personal consumption index, slowed to 1.0
percent in March from 1.3 percent in February, the smallest gain
in three and a half years.
    Market inflation expectations as measured by forward
contracts that show where traders think five-year inflation will
be in five-years time, also a closely watched indicator by the
Fed, have also slipped. The contracts now show expectations of
2.77 percent, down from around 3 percent at the beginning of the
    "It's possible that the Fed starts to focus on inflation as
a reason to extend QE, rather than unemployment," said Carl
Lantz, head of U.S. interest rate strategy at Credit Suisse in
New York.
    The Federal Reserve said on Wednesday it may increase or
decrease bond purchase from its current $85 billion per month,
depending on the strength of the economy and on inflation,
though most see the Fed as more likely to continue purchases for
    Before the recent slowdown in data most economists had
expected the Fed would taper buying this year, and end purchases
at the end of the year.
    The Fed bought $3.31 billion in notes due 2020 to 2023 on
Monday as part of this program and will purchase between $1.25
billion and $1.75 billion in bonds due 3026 to 2043 on Tuesday.
    The relatively higher yields, meanwhile, are expected to
help the Treasury sell $32 billion in three-year notes on
Tuesday, $24 billion in 10-year notes on Wednesday and $16
billion in 30-year bonds on Thursday.
    "The higher yields will entice some buying," said Lantz.
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