Bonds Gain on Signs of Employment Weakness

U.S. government debt prices rose on Wednesday after data showing a surprisingly steep drop in U.S. private payrolls in June, exacerbating worries about consumer spending in a sputtering economy.

The ADP private jobs data is thinly correlated with the widely watched monthly U.S. non-farm payrolls report, scheduled for release on Thursday. ADP data was weak enough to reinforce bond traders views that Thursday's report will show a deteriorating labor market.

"A bid in Treasurys is perfectly appropriate to hedge bad news in June's formal employment report tomorrow," said David Dietze, chief investment strategist at Point View Financial Services in Summit, N.J.

The ADP National Employment Report, which traders see a preview to the government's monthly jobs reading, showed domestic private payrolls shed 79,000 jobs in June, accelerating from a downwardly revised 25,000 increase in May.

Wall Street economists had forecast a decline of 20,000.

"It was a splash of cold water in our face to see the reports of joblessness in June shooting up like that, suggesting we are just not out of the woods by any means in terms of skirting recession," Dietze said.

Government bond prices gain on perceptions the economy is succumbing to yet more strain, especially if rising joblessness further curtails consumer spending, which accounts for about two thirds of U.S. economic activity.

The benchmark 10-year Treasury note's price, which moves inversely to its yield, rose 11/32 for a yield of 3.96 percent, versus 4.01 percent late Tuesday.

"It looks like we're still seeing job cuts as economic growth is very weak. It suggests that the June employment numbers on Thursday will probably also be weak. It keeps the Fed on hold for a while," said Gary Thayer, senior economist at Wachovia Securities in St. Louis, Mo.

The weaker-than-expected ADP data led traders to trim their expectations of an imminent interest rate hike from the Federal Reserve.

U.S. interest rates suggested traders now see roughly a 21 percent chance of the Fed raising rates at its August policy meeting, down from 26 percent prior to the ADP report. But they still show traders bracing for at least one rate increase by year-end.

Two-year Treasury notes were up 4/32 in price for a yield of 2.59 percent, versus 2.66 percent late Tuesday.

U.S. stocks came under pressure late on Wednesday morning, adding to Treasuries safe-haven appeal.

The 30-year long bond was up 20/32 for a yield of 4.51 percent yield, down from 4.55 percent late Tuesday.