TREASURIES OUTLOOK-Prices drop before holiday; eyes on payrolls
* Markets await June nonfarm payrolls data on Friday
* Economists in a Reuters poll see payrolls rising 165,000
* Debt market to close early ahead of U.S. Independence Day holiday
NEW YORK, July 3 (Reuters) - U.S. Treasuries slipped on Wednesday in a shortened pre-holiday session, with investors nervously awaiting key labor market data on Friday. The U.S. debt market closed early at 2 p.m. (1800 GMT) on Wednesday. It will remain closed on Thursday for the U.S. Independence Day holiday. Markets will re-open on Friday, when U.S. nonfarm payrolls data will be released. Those figures could shed more light on a major question facing markets around the world these days: When might the U.S. Federal Reserve slow its $85 billion-per-month bond buying program? The health of the labor market will be a major factor in policymakers' decision. Investors and analysts have closely scrutinized earlier jobs reports for clues. Those data included Wednesday's report from payrolls processor ADP, which said U.S. private employers added 188,000 jobs in June, easily topping economists' forecasts for 160,000 new jobs. A drop in new jobless claims in the week ended Saturday also painted a brighter picture of the labor market. Any hints the Fed might pull back on buying Treasuries and mortgage-backed securities could be negative for U.S. government debt. Weak economic data, in contrast, would bolster views that the Fed will keep supporting the world's biggest economy for awhile yet. 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 U.S. Treasury note was last down 9/32 on the day to yield at 2.505 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 in New York. The national security adviser to Islamist President Mohamed Mursi said a military coup in Egypt is under way. But the U.S. State Department said that the situation in Egypt remained fluid, and the United States could not confirm whether a military coup is under way.
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 mid-year 2014, based on his forecast," Rupkey said.
(Additional reporting by Luciana Lopez; Editing by Jan Paschal)