July 31, 2014 / 7:00 PM / 3 years ago

TREASURIES-Prices stabilize on month-end demand

(Updates prices)
    * Yield curve steepens from five-year lows
    * Month-end demand overcomes earlier price losses
    * Inflation risk seen as labor costs rise
    * Payrolls data on Friday in focus

    By Karen Brettell
    NEW YORK, July 31 (Reuters) - Most U.S. Treasuries were
steady on Thursday, overcoming earlier price losses, as
investors sought out lower risk debt for month-end rebalancing.
    U.S. government debt has weakened since gross domestic
product data on Wednesday showed a strong rebound in the second
quarter from a weak start to the year.
    That extended into Thursday morning as data showed U.S.
labor costs recorded their largest increase in more than 5-1/2
years in the second quarter, a sign that a long-awaited
acceleration in wage growth was imminent. 
    The debt stabilized, however, as investors shifted out of
stocks and into bonds for month-end window dressing. 
    "There is some month-end buying, both here and in Europe,"
said Dan Mulholland, managing director in Treasuries trading at
BNY Mellon in New York.
    Treasuries also pared losses after a report showed the pace
of business activity in the U.S. Midwest in July sank to its
slowest level since June 2013. 
    Benchmark 10-year notes were little changed to
yield 2.56 percent, after earlier rising as high as 2.61
percent, the highest since July 8.
    U.S. data has come back into focus this week in a heavy
economic calendar as investors continue to grapple with when the
Federal Reserve is likely to begin raising interest rates.
    The next major focus will be Friday's jobs report for July.
Employers are expected to have added 233,000 jobs, according to
the median estimate of 100 economists polled by Reuters.
    Rising labor costs earlier on Thursday led some investors to
see a greater likelihood the Fed will increase interest rates
next year, while others fear that higher inflation is likely if
the U.S. central bank is too slow to act.
    "In general, you have decent data and if the Fed's behind
the curve, you will wind up with inflation running a little bit
higher than people thought," said Ira Jersey, an interest rate
strategist at Credit Suisse in New York.
    The Fed acknowledged firmer prices and improving data on
Wednesday but also expressed concern about remaining slack in
the labor market. 
    The yield curve steepened as investors adjusted to the
prospect of higher inflation. The yield gap between five-year
notes and 30-year bonds widened to 156 basis points, up from a
five-year low of 149 basis points on Wednesday.
    A Morgan Stanley index meant to gauge the timing of the
first interest rate hike (M1KE) on Wednesday suggested an
increase may occur within 12 months. It was the first time since
2011 the index has indicated a rate increase will occur within a
year, an analyst at the bank said in a report.
    Based on that indicator, the bank said two-year note yields
should pay 0.68 percent, 12 basis points higher than the current
yield of 0.56 percent.

 (Editing by Nick Zieminski and Tom Brown)

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