Bonds Flat to Lower Before Holiday, Payrolls Report

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U.S. Treasurys prices fell on Wednesday in a shortened pre-holiday session with investors nervously awaiting labor market data on Friday that could help shed more light on the Fed's bond buying program. The U.S. debt market will close early at 2 p.m. on Wednesday and remain closed on Thursday for the Fourth of July U.S. Independence Day holiday.

The U.S. debt market closed early at 2 p.m. and will be closed on Thursday for the U.S. Independence Day holiday.

Markets will re-open on Friday, when U.S. nonfarms payrolls data are released. Those figures could help answer a major question facing markets around the world - 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 Treasurys 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 Treasurys 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 9/32 on the day to yield at 2.505 percent, up from 2.47 percent late on Tuesday.

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An appetite for safety kept U.S. Treasurys from moving very far into the minus column, however.

Traders were concerned about political turmoil in Egypt and resignations from Portugal's government that could interfere with Lisbon's exit from an international bailout.

In Egypt, the national security advisor to Islamist President Mohamed Mursi said a military coup is underway. But the U.S. State Department said that the situation in Egypt remains fluid.

Investors are looking ahead to Friday's nonfarm payrolls. 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. He said the overall claims data "support a drop of two-tenths in the unemployment rate to 7.4 percent."

—By Reuters

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