Reuters
U.S. Treasuries gain, July employment data eyed
Wednesday August 4, 1:42 pm ET
By Ellen Freilich
(updates prices, comment)
NEW YORK, Aug 4 (Reuters) - Treasury prices climbed on Wednesday after a sharp drop in the employment component of a service sector index raised questions about how strong employment growth was in July.
Economists polled by Reuters late last week estimated that 228,000 were created last month after a disappointing result for June. The Labor Department report is due on Friday.
Bond prices initially dipped after the Institute for Supply Management index of service sector activity rebounded to 64.8 in July from 59.9 in June.
But attention then shifted to the sharp drop in the survey's employment index, which sagged to 50.0 in July from 57.4 the month before. One trader said it was the sharpest month-to-month drop in the index in its seven-year history.
"There's a reasonable correlation between the employment component of the non-manufacturing ISM index and non-farm payrolls growth and since the majority of payroll gains have been on the service side, if the service employment component of the ISM is down, that raises a red flag about the July payrolls data that may be worth noticing," one market participant said.
Bond prices climbed as analysts began to assess the risk that payroll growth in July might turn out to have been weaker than the prevailing forecast.
"The change in the ISM non-manufacturing employment index was striking," said Michael Moran, chief economist at Daiwa Securities America. "It was near a record level in June, but moved to the break-even level in July. It leads you to question what might have happened to payrolls in July."
Moran said he would not formally revise his forecast -- now at 235,000 new jobs -- for July.
"But my confidence in my forecast is shaken and this very much does create downside risks for the number," Moran said.
The benchmark 10-year note (US10YT=RR) was up 7/32, leaving its yield at 4.40 percent from 4.43 percent late Tuesday. Two-year yields (US2YT=RR) edged down to 2.63 percent from 2.65 percent.
Also out on Wednesday were data on U.S. factory orders which showed a firmer-than-expected 0.7 percent rise in June, though this was considered old news and had little impact.
Five-year notes (US5YT=RR) were up 4/32, while their yield ticked down to 3.63 percent from 3.65 percent. Thirty-year bonds (US30YT=RR) rose 11/32, yielding 5.15 percent from 5.17 percent.
Earlier, Treasuries had eased after the U.S. government announced the terms of its quarterly refunding, scheduled for next week.
Treasury said it would sell $51 billion of new debt next week, at the lower end of market expectations which ranged from $51 billion to $54 billion.
But some selling ensued at the long end of the maturity curve on disappointment that Treasury kept its current auction schedule. Some had hoped it would abandon the quarterly reopening of 10-year note sales.
Treasury cut its offering of three-year paper to $22 billion, which will be sold a day early on Monday to avoid clashing with the Federal Reserve policy meeting on Tuesday. Some $15 billion of five-year paper will be auctioned on Wednesday and $14 billion of 10-year notes on Thursday.
"The most important information to be taken from the refunding announcement is Treasury's willingness to spread reductions in coupon issuance across the curve," said Mark Mahoney, Treasury market strategist at UBS.
Many had assumed that if Treasury had reduced borrowing needs it would trim the 10-year the most and then the five-year issuance.
"While the curve impact should be limited, the potential liquidity premium in the current 10-year will suffer," said Mahoney.
