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TREASURIES-U.S. bond prices fall on upbeat economic data

Richard Leong
Wednesday, 4 Dec 2013 | 12:00 PM ET

* Upbeat ADP jobs data support view on Fed tapering

* New home sales post biggest percentage rise in 33 years

* U.S. 10-year yield rises to highest since mid-Sept

* ISM services gauge falls more than expected in Nov

NEW YORK, Dec 4 (Reuters) - U.S. Treasuries prices slumped on Wednesday as robust data on private-sector jobs and new home sales supported expectations that the Federal Reserve would be encouraged to pare its stimulative bond purchases sooner than expected. The price decline pushed benchmark yields to their highest level since mid-September. Short- and medium-dated yields climbed to their highest levels in about three weeks. The market stabilized after the Institute for Supply Management's gauge on U.S. services industries fell more than expected in November, suggesting slower growth in that sector and reviving some bids for government bonds. "The market is pricing in a slightly higher probability of a tapering in December or January," said Mike Cullinane, head of Treasuries trading at D.A. Davidson in St. Petersburg, Florida. Most analysts expect the Fed to begin reducing its bond purchases at its March meeting, but some think it could happen as early as December or January, if employment data comes in strong. "Tapering is not if but when, but the Fed wants to see more data before they taper," said Bret Barker, portfolio manager at TCW Group in Los Angeles. He anticipates a purchase reduction will likely occur in March. Payroll processor ADP said on Wednesday U.S. companies added 215,000 jobs in November, the biggest monthly rise in a year. This compared with an upwardly revised 184,000 increase in October and a 173,000 gain forecast by analysts polled by Reuters. Some analysts use the ADP data to adjust their forecasts on the government's payroll reading. Economists polled by Reuters forecast U.S. employers likely added 180,000 workers in November following a 204,000 increase in October. The U.S. Labor Department will release its November payroll report at 8:30 a.m. EST (1530 GMT) on Friday. Other data supporting a Fed withdrawal of stimulus by early 2014 included a contraction in the U.S. trade gap in October stemming from record exports and a 25.4 percent jump in new home sales in October, the largest monthly gain since May 1980.

On the open market, benchmark 10-year notes last traded 19/32 lower in price to yield 2.844 percent, up 7.1 basis points from late on Tuesday. The 10-year yield touched 2.852 percent, the highest level since mid-September. Thirty-year bonds shed more than 1 point in price to yield 3.899 percent, up 6 basis points from Tuesday, while the two-year notes slipped 1/32 in price to yield 0.297 percent, up 1.2 basis points from Tuesday's close. The yield curve as measured by the yield difference between two-year and 10-year Treasuries, grew to 2.55 percent. This proxy on investors' view on U.S. growth hit its widest level since July 2011, according to Reuters data. "Anything positive with the data right now is likely to cause more selling in bonds and the yield curve to steepen," said Mary Beth Fisher, head of U.S. interest rates strategy at SG Corporate & Investment Bank in New York.

Another month of solid job gains would support ideas that the Fed will soon trim its third round of quantitative easing, known as QE3, which began a year ago and has involved $85 billion of monthly purchases of Treasuries and mortgage-backed securities. Prices on agency mortgage-backed securities fell, too, on worries about the Fed tapering its bond purchases. The 30-year 3.5-percent coupon MBS backed by Fannie Mae fell 12/32 in price to yield 3.512 percent, up 5 basis points from Tuesday. On Wednesday, the U.S. central bank bought $3.18 billion in notes due 2022 to 2023, part of its QE3 plan to buy $45 billion of Treasuries in December.