TREASURIES-Prices flat to lower before holiday, payrolls report
* Markets awaiting June 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 3 (Reuters) - U.S. Treasuries prices were flat to slightly lower on Wednesday in an abbreviated pre-holiday trading session, the last one before the release of the key U.S. employment report. The U.S. debt market will close early at 2 p.m. (1800 GMT) on Wednesday and close on Thursday for the Fourth of July U.S. Independence Day holiday. Prices erased early gains when a report by payrolls processor ADP said U.S. private employers added 188,000 jobs in June, easily topping economists' forecasts for 160,000 jobs, leading investors to expect that the key U.S. employment report due on Friday could also show respectable job growth. A drop in new jobless claims in the week ended Saturday also painted a brighter picture of the labor market, a negative for bond prices because it might seem to hasten the day when the Federal Reserve would trim its massive bond-buying program aimed at stimulating the economy and lowering unemployment. News that the U.S. trade deficit was wider than forecast in May briefly lifted Treasuries out of the minus column. "The larger trade deficit means downward revisions to Q2 GDP estimates," said Ian Lyngen, senior government bond strategist at CRT Capital Group in Stamford, Connecticut. The benchmark 10-year Treasury note was last down 2/32 on the day, its yield at 2.48 percent, up from 2.47 percent late on Tuesday. An appetite for safety kept U.S. Treasuries from moving very far into the minus column, however. "Egypt is becoming the main focus as the government crackdown deadline nears, and Portugal's government is in a total meltdown," said Thomas di Galoma, one of the heads of bond trading at ED&F Man Capital Markets. Egypt's army commander and Islamist President Mohamed Mursi each pledged to die for his cause as a deadline neared on Wednesday that would trigger a military takeover backed by protesters. In Europe, Portugal's president summoned main political parties for crisis talks over the government's future with markets reeling on fears that a snap election could interfere with Lisbon's exit from an international bailout.
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. "The decks are cleared now for payroll jobs on Friday," said Chris Rupkey, managing director and chief financial economist at Bank of Tokyo-Mitsubishi UFJ in New York. "The yield rally on bonds needs a strong number to support it, and early September tapering of quantitative easing needs the same. We will see." Rupkey's forecast of 165,000 new jobs for June matches the consensus estimate. "No reason to move off of that (estimate), although unemployment claims still look summer swoon-like in that the best level since the recession remains 327,000 at the end of April. This is a long time not to see a better figure," he said. Rupkey said the overall claims data "support a drop of two-tenths in the unemployment rate to 7.4 percent." The unemployment rate was "just barely 7.6 percent last month anyway with the three-digit number 7.555 percent," he noted. "Keep in mind (Federal Reserve Chairman Ben) Bernanke says quantitative easing will be completely wound down when unemployment is 7 percent, which could be midyear 2014 based on his forecast," Rupkey said.