TREASURIES-Bonds gain on job losses, weak stocks

By John Parry

NEW YORK, July 2 (Reuters) - U.S. government debt prices rose on Wednesday after a surprisingly steep drop in U.S. private payrolls in June worsened concerns about consumer spending in a faltering economy.

Sagging stocks added to demand for safe-harbor Treasuries as the Dow Jones industrial average ended the session in a bear market, down more than 20 percent from October's record close.

The ADP private jobs data is thinly correlated with the widely watched monthly U.S. non-farm payrolls report, scheduled for release on Thursday. The ADP data was weak enough to reinforce bond traders' views that Thursday's report will show a deteriorating labor market.

"Generally, the Treasury market is preparing itself for a weak payrolls number, and that is what is driving the market higher," said Tom Tucci, head Treasuries trader at RBC Capital Markets in New York.

Weak stocks also stoked a safe-haven bid for shorter-maturity Treasuries, Tucci said.

Two-year Treasury notes <US2YT=RR> were up 4/32 in price for a yield of 2.60 percent, compared with 2.66 percent late Tuesday.

The ADP National Employment Report, which traders see as a preview to the government's monthly jobs reading, showed domestic private payrolls shed 79,000 jobs in June, accelerating from a downwardly revised 25,000 increase in May. Wall Street economists had forecast a decline of 20,000, according to a Reuters poll. For details, see [ID:nN02359314].

"It was a splash of cold water in our face to see the reports of joblessness in June shooting up like that, suggesting we are just not out of the woods by any means in terms of skirting recession," said David Dietze, chief investment strategist at Point View Financial Services in Summit, New Jersey.

Government bond prices gain on perceptions that the economy is succumbing to yet more strain, especially if rising joblessness further curtails consumer spending, which accounts for about two-thirds of U.S. economic activity.

The benchmark 10-year Treasury note's price, which moves inversely to its yield, rose 9/32 for a yield of 3.97 percent <US10YT=RR>, down from 4.01 percent late Tuesday.

U.S. crude oil futures CLc1 rose to a new intraday record above $144 per barrel on Wednesday. Gold also rose, pushed up by inflation fears driven by surging oil and food prices.

"You are starting to see an impact of energy costs," said Keith Springer, President of Capital Financial Advisory Services in Sacramento, California. "People are not spending, and consumer spending accounts for some 70 percent of economic activity."

Springer expects commodity prices to continue rising for several more months, while the Federal Reserve keeps interest rates on hold, increasing the risk that longer-maturity bond yields will rise as inflation accelerates.

"It looks like we're still seeing job cuts as economic growth is very weak. It suggests that the June employment numbers on Thursday will probably also be weak. It keeps the Fed on hold for a while," said Gary Thayer, senior economist at Wachovia Securities in St. Louis, Missouri.

The weaker-than-expected ADP data led traders to trim their expectations of an imminent interest rate hike from the Fed.

U.S. interest rates suggested traders now see roughly a 21 percent chance of the Fed raising rates at its August policy meeting, down from 26 percent before the ADP report. But they still show traders bracing for at least one rate increase by year-end.



Keith Springer is Registered Investment Advisor and President of Capital Financial Advisory Services, providing Wealth Management, advanced Retirement Planning and Mortgage Consulting Services. For more information, please contact Keith Springer at 916-925-8900 or Keith@KeithSpringer.com