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Treasuries Snap 2-Day Rally as Job Outlook Spurs Bets on Economy

Treasuries ended a two-day rally as a private report said U.S. companies added more jobs than forecast and economists said government data tomorrow will show nonfarm payrolls gained, fueling bets economic growth is accelerating.

Ten-year yields rose from a one-week low as stocks climbed after the European Central Bank signaled it will ease Portugal’s access to emergency funds. ADP Employer Services said U.S. firms’ payrolls increased by 157,000 jobs in June, and unemployment claims fell for the first time in three weeks. The U.S. said it will sell $66 billion in notes and bonds next week.

“It’s all about the data,” Siddharth Joshi, an interest-rate strategist in New York at Citigroup Inc., said in an interview. The firm is one of 20 primary dealers that trade with the Federal Reserve. “People are waiting for a good number on NFP and if so, we’ll see a sharp sell-off.”

Yields on benchmark 10-year notes increased three basis points, or 0.03 percentage point, to 3.14 percent at 5 p.m. in New York, according to Bloomberg Bond Trader prices. Earlier they rose as much as seven basis points. The 3.125 percent securities maturing in May 2021 dropped 1/4, or $2.50 per $1,000 face amount, to 99 7/8.

The 10-year note yields touched 3.07 percent yesterday, the lowest level since June 29. Two-year note yields climbed five basis points to 0.47 percent today and touched 0.48 percent, the highest since July 1. They fell to 0.32 percent on June 24, a seven-month low.

Treasuries have returned 2.6 percent this year after gaining 5.9 percent in 2010, according to a Bank of America Merrill Lynch index.

Stocks, Commodities Gain

Stocks and commodities rose. The Standard & Poor’s 500 Index advanced 1.1 percent and the Thomson Reuters/Jefferies CRB Index of raw materials climbed 1.8 percent.

“There’s been a return to risk assets, with equities doing better,” said Dan Mulholland, a trader in New York at RBC Capital Markets, the investment-banking arm of Canada’s biggest bank. “We’ve had better-than-expected data.”

ADP’s job-growth estimate for June was more than double the median forecast of economists surveyed by Bloomberg News for an increase of 70,000 positions.

Initial claims for jobless benefits fell by 14,000 to 418,000 in the week ended July 2, Labor Department figures showed in Washington. The median forecast of economists in a Bloomberg News survey called for a drop to 420,000.

“The market had a little bit of a back-up on it,” said Steven Ricchiuto, chief economist in New York at Mizuho Securities USA Inc., a primary dealer. “The economy is not on the verge of collapsing.”

Nonfarm Payrolls

U.S. employers added 105,000 jobs last month after an increase of 54,000 in May, according to the median forecast of 85 economists in a Bloomberg survey before the Labor Department’s nonfarm payrolls report tomorrow. The unemployment rate held at 9.1 percent, another survey projected.

“There is more potential for Treasuries to sell off than to rally given an equal NFP surprise on either side,” Citigroup’s Joshi wrote in a note to clients.

If payrolls rise by 50,000, 10-year yields will increase by 10 basis points; if payrolls drop by 50,000, 10-year yields will fall by about five basis points, he wrote.

Kansas City Fed President Thomas Hoenig, the central bank’s longest-serving policy maker, said U.S. economic growth will probably persist while facing risks from the federal deficit and Europe’s debt crisis.

“We are finishing our second year for recovery,” Hoenig said today in a speech in Ada, Oklahoma. “The outlook for recovery continues to be positive.”

Collateral Rules

The ECB’s decision to suspend the minimum collateral rules for Portuguese government debt in the central bank’s refinancing operations followed waivers of minimum thresholds for Greek and Irish bonds. All three nations, starting with Greece, had to seek international bailout packages.

“That is telling you clearly that Portugal is as much of a concern as Greece and Ireland,” said Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors. “That’s brought in dip-buying.”

The ECB also increased its benchmark interest rate to 1.5 percent, the highest level since March 2009, from 1.25 percent. Bank President Jean-Claude Trichet signaled he may raise rates again in coming months.

Treasury Auctions

With less than a month to go before the Treasury Department says the government won’t be able to pay its debt, the U.S. said it will sell next week $32 billion of three-year notes, $21 billion of 10-year debt and $13 billion of 30-year bonds. The sizes of the daily auctions, which begin July 12, are unchanged from the last time the Treasury sold the securities in June.

President Barack Obama’s administration and congressional leaders are seeking an accord to increase the $14.3 trillion federal debt before Aug. 2, the Treasury’s projected date for expiration of its borrowing authority.

Cash inflows from U.S. money market funds as they reduce investments in European banks is driving short-term interest rates lower, according to JPMorgan Chase & Co.’s Terry Belton.

“One of the sources of funding for European banks -- not peripheral Europe, but core Europe, banks in France and Germany -- are the U.S. money funds,” Belton, the firm’s global head of fixed-income and foreign-exchange research, said in a radio interview on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt. “As the markets become concerned around Europe, they pull back a bit.”

The one-month Treasury bill rate fell below zero last week for the first time since January 2010 as investors sought safety. It touched negative 0.0101 percent today before trading at 0.0203 percent, according to Bloomberg Bond Trader data.

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