By Ellen Freilich
NEW YORK, Aug 5 (Reuters) - U.S. government debt prices fell
on Monday as traders trimmed bond holdings after surprisingly
strong data on the U.S. services sector and before auctions of
new coupon supply.
Profit-taking after last week's late rally - based on a
weaker than forecast July employment report - also weighed on
bond prices, as did a little lightening of positions ahead of
Treasury refunding auctions this week, traders said.
U.S. bond prices erased just some of Friday's rise in
advance of this week's August refunding during which the
Treasury will sell $72 billion worth of coupon-bearing debt.
'Bond prices fell on a combination of an early morning
pullback after Friday's rally before supply this week, and then
the stronger than expected ISM Non-Manufacturing data,' said
John Briggs, managing director, markets at RBS in Stamford,
The Institute for Supply Management's index on the U.S.
services sector rose to 56.0 from 52.2 in June, signaling
ongoing improvement in retail, restaurant and other services
industries. Analysts had forecast a July reading of 53.0.
The latest ISM services figure matched the level last seen
in February and rebounded from a three-year low.
The Treasury Department will sell $32 billon in three-year
debt on Tuesday, $24 billion in 10-year notes on Wednesday and $16 billion in 30-year bonds on
With yields hovering near two-year highs, the upcoming
supply might entice income-oriented investors who have stayed on
On the open market, benchmark 10-year notes
slipped 10/32 in price to yield 2.64 percent, up from 2.60
percent late on Friday.
The 30-year bond was down 24/32, its yield
rising to 3.74 percent from 3.69 percent late on Friday.
Exiting from weekend safe haven positions due to U.S.
embassy closures in the Middle East and Africa after an al Qaeda
threat also caused Treasury yields to rise.
While U.S. payrolls grew 162,000 last month, falling short
of traders expectations, analysts said the slower hiring might
not be enough to keep the Federal Reserve from scaling back its
bond-purchase stimulus as early as September.
Nancy Vanden Houten, market analyst at Stone & McCarthy
Research Associates in Princeton, New Jersey, said she believed
the Fed would announce some cutbacks in bond purchases at its
September policy meeting and begin to carry them out in October.
A couple of factors could color that decision, though, she
said. Disappointing job growth in August, for instance, could
make the Federal Reserve more reluctant, or cautious, about
reducing its monetary stimulus.
Another is a potential showdown over the debt limit, Vanden
Houten said. If Congress refuses to raise the debt limit, that
could add to the U.S. fiscal restraint that many say is already
hampering the economy's recovery.
'We've heard Bernanke express concerns about that, and if
they were on the fence, that could tip them toward holding off
(on reducing bond purchases,' she said. If Republicans facing
election bids are afraid to make any deals on the debt ceiling,
that's a new reason for concern, she said.
'Still, on a summer Monday right after the monthly jobs
report, we should not make too much of today's move,' she said.
Remarks from Dallas Fed President Richard Fisher seemed to
have little impact on bonds.
'He said nothing that was new for him. He's slightly hawkish
and said tapering is on the horizon,' Vanden Houten said.
Apart from the jobs report, other recent data suggested the
U.S. economy is expanding, albeit at a modest pace that has kept
unemployment high and inflation at a worrisome low level.
Services industries slowed their hiring in July and
suppressed overall payroll growth. That disappointed investors
and reduced bets the Federal Reserve might cut its monthly bond
purchases later this year.
Until data point to a decisive acceleration in economic
growth, some fund managers are not convinced the central bank
will scale back its $85 billion of monthly purchases of
Treasuries and mortgage-backed securities.
'The economic numbers have to be overwhelmingly convincing
that there's only an upward path for the economy,' said James
Barnes, senior fixed income portfolio manager at National Penn
Investors Trust Co. in Wyomissing, Pennsylvania.
The central bank bought $1.496 billion in Treasuries that
will come due in February 2036 through November 2042, as a part
of its quantitative easing program, known as QE3, which is aimed
at helping the economy.
(Additional reporting by Richard Leong, editing by Chris Reese
and Andrew Hay)
Keywords: MARKETS USA BONDS/
(-------MARKET SNAPSHOT AT 3:30 p.m. EDT (1930 GMT)------- Sept T-Bond 133-05/32 (-18/32) Sept 10-Year note 126-11/32 (-08/32) Change vs Current Nyk yield Three-month bills 0.04 (+0.05) 0.041 Six-month bills 0.075 (+0.00) 0.076 Two-year note 99-28/32 ( unch ) 0.317 Five-year note 99-30/32 (-04/32) 1.391 10-year note 92-11/32 (-11/32) 2.645 30-year bond 84-20/32 (-24/32) 3.735 DOLLAR SWAP SPREADS LAST Change U.S. 2-year dollar swap spread 17.75 (+1.00) U.S. 3-year dollar swap spread 19.00 (+0.50) U.S. 5-year dollar swap spread 17.75 (+1.00) U.S. 10-year dollar swap spread 17.50 (+0.25) U.S. 30-year dollar swap spread -3.50 (+0.50))
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