Treasurys Pull Back After Historic Rally

U.S. Treasurys prices fell Wednesday as investors pulled back from a recent price surge that pushed yields down to the lowest in more than 50 years.

Losses were limited by data showing a larger-than-expected contraction in private sector payrolls in November and a record low reading of U.S. services activity -- all of which would normally ignite a safe-haven bid for government debt.

"The market is taking a bit of a breather. On the fundamentals it is getting harder to justify (higher prices)," said Carl Lantz, interest rate strategist at Credit Suisse in New York.

Benchmark 10-year Treasury notes were trading 13/32 lower in price for a yield of 2.75 percent, from 2.70 percent late Tuesday. Benchmark yields, which move inversely to prices, Monday reached as low as 2.65 percent, the lowest in at least five decades.

Two-year Treasury notes were trading 3/32 lower in price for a yield of 0.94 percent, up from 0.90 percent late Tuesday but still below the Federal Reserve's target rate for overnight lending between banks of 1 percent.

A measure of the vast U.S. service sector slumped further than expected to a record low of 37.3 in November, according to the Institute for Supply Management, from 44.4 in October. A reading of 50 separates expansion from contraction.

Economists expected a reading of 42.0, according to the median of 71 forecasts in a Reuters poll that ranged from 37.0 to 46.5.

"The severe damage to the service industry is another indication of the extraordinary force of this recession," said Pierre Ellis, senior economist at Decision Economics in New York.

Also, ADP Employer Services said Wednesday that U.S. private employers cut 250,000 jobs in November, marking the most in seven years. ADP also revised the number of jobs cut in October to 179,000 from the originally reported loss of 157,000.

Traders said the ADP data reinforced expectations of a large contraction in November non-farm payrolls, to be released on Friday.

"(ADP) are telling a story that it got a lot worse in November. That is the main thing to take away from it," said Nigel Gault, chief U.S. economist at Global Insight in Lexington, Mass.

The median of forecasts from economists polled by Reuters is for non-farm payrolls to have fallen by 320,000 last month after shrinking by 240,000 in October.

Other data Wednesday showed that U.S. non-farm productivity was slightly stronger than initially forecast in the third quarter, although the pace of growth remained the slowest this year as output recorded its biggest decline in seven years.

Five-year Treasury notes traded 9/32 lower in price for a yield of 1.72 percent, from 1.66 percent late Tuesday, while the 30-year bond was 21/32 lower for a yield of 3.22 percent, from 3.19 percent.

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