TREASURIES-Cash scramble sinks bill yields ahead of payrolls
* Markets awaiting nonfarm payrolls data on Friday
* Economists in a Reuters poll see payrolls rising 165,000
* Payrolls could set the tone for the next few weeks
NEW YORK, July 2 (Reuters) - Interest rates on some Treasury bills turned negative on Tuesday as investors scrambled for cash-like assets to guard against volatile trading that could come from Friday's U.S. payrolls data. The negative interest rates mean the securities are so in demand that investors will take a return lower than their principal - a reflection of market jitters heading into Friday's jobs figures. In addition, demand for T-bills surged as bond and stock fund managers sought the liquid vehicles to hold cash as they expect a jump in redemptions on the recent sell-off in bonds and stocks. Money market funds also scooped up T-bills and other ultra short-term investments to hold cash from recent redemptions from stock and bond funds, analysts and traders said. "This is probably a delayed quarter-end effect. Money funds are likely deploying the cash they have received due to redemptions from other areas. They are parking their cash there (T-bills) until the coast is clear," said Mike Cullinane, head of Treasuries trading at D.A. Davidson in St. Petersburg, Florida. Last week's end of the quarter also left some dealers short T-bills and other coupon issues, leaving them to scramble to cover those trades. Some traders said these dealers were either unwinding shorts before payrolls, or hope to slowly unwind them by borrowing them via repos. With the constraints of month-end positioning and quarter-end window dressing done, there was also more cash coming into the system and looking for a home. Repo and T-bills fit those needs given their highly liquid, high-quality status.
In early Tuesday trading, the interest rates on Treasury bills that mature later this week into late September slipped near zero. The T-bill issue due on Sept. 5 was quoted at minus 0.25 basis points to minus 1.25 basis points. The drop in T-bill rates also led to a decline in interest rates on repurchase agreements and other money market rates. The rate on overnight repos backed by Treasuries were quoted at 8 basis points, compared with 11 basis points from late on Monday. Repo rates backed by three-year notes moved deeper into negative territory, last trading at minus 35 basis points, while repos backed by 10-year and 30-year Treasuries traded slightly below zero early in the session. The U.S. Treasury Department sold $30 billion in one-month T-bills on Tuesday at an interest rate of 1.5 basis points, matching the level cleared at an one-month bill auction held on Dec. 18. In contrast, investors were reluctant to take large positions in longer-dated Treasuries. "The market's in a bit of a holding pattern as we await Friday's employment report," said Ian Lyngen, senior government bond strategist at CRT Capital Group in Stamford, Connecticut. "Given the relevance of the labor market to the near-term Fed policy decisions, NFP (nonfarm payrolls) will likely set a tone for the market for the next several weeks," he added. The benchmark 10-year Treasury note traded 1/32 lower in price to yield 2.479 percent on Tuesday, up slightly from 2.477 percent late on Monday. The benchmark 10-year yield reached a 22-month high of 2.67 percent Monday of last week following earlier remarks by U.S. Federal Reserve Chairman Ben Bernanke, who said the central bank could slow its asset purchase program later this year. Treasuries have since recovered a portion of the lost ground as some analysts said the selloff was overdone. Fed speakers have also taken pains to point out the bank will not be ready to raise its key interest rate for quite a while yet. Investors are now eyeing Friday's nonfarm payrolls release to gauge the health of the labor market. Fed policymakers want to see the unemployment rate fall to close to 6.5 percent from its current 7.6 percent, with robust and sustained job growth. Economists in a Reuters poll see a net gain of 165,000 jobs in U.S. payrolls. The release is slated for the day after the July 4 Independence Day holiday, and trading is expected to be thin at the end of the week - a situation that could exacerbate volatility. Weak manufacturing employment figures on Monday fanned speculation the payrolls figure could disappoint. A weaker-than-expected payrolls release could actually help Treasuries prices as the more the labor market flags, the likelier the Fed is to continue its asset purchases to prop up the economy. Conversely, a strong jobs report would likely fuel an outlook for a Fed pullback in coming months.
(Additional reporting by Roseanne Briggen at IFR; Editing by Theodore d'Afflisio and Chris Reese)