TREASURIES-Bonds sell off ahead of key US payrolls report

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NEW YORK (Reuters) - Treasuries prices fell on
Thursday as traders took defensive positions a day ahead of the
government's report on U.S. non-farm payrolls and after Moody's
Investors Service warned on the risk of a U.S. debt default.
    Losses accelerated after Moody's said in a statement that
failure by Congress to raise the legal borrowing limit for the
United States would put the country's top credit rating in
jeopardy.
    The cost of insuring U.S. debt for five years against a
default rose to 51 basis points on Thursday from 46 basis
points a day earlier, according to Markit.
    The cost of insurance on U.S. debt for one year
jumped to 38 basis points from 32.
    But traders said the bulk of the selling was driven by
profit-taking after a rally Wednesday, along with
repositioning ahead of the Labor Department's May payrolls
report, due on Friday at 8:30 a.m..
    ``The actual story by Moody's doesn't really tell us
anything new,'' said John Brady, senior vice president at MF
Global Securities in Chicago.
    ``The market was selling off this morning before the Moody's
story, and it's going to continue to sell off as traders take
away their long positions ahead of tomorrow morning's payrolls
number.''

    BIG RALLY, BIG SELL-OFF
    Domestic and overseas investors reduced their benchmark
10-year note holdings on Thursday in the biggest single-day
sell-off since Feb. 8. The drop in 30-year bond prices was on
track to be the largest single-day of selling in more than four
months, since Jan. 26.
    On Wednesday the bond market posted its biggest one-day
rally in about 2-1/2 months in reaction to disappointing
private sector jobs data from ADP and a weaker-than-expected
report on manufacturing from the Institute for Supply
Management.
    The weak figures from ADP had sparked fears that the
government's report on Thursday on filings for jobless benefits
might also be dismal.
    ``There were expectations that the claims were going to be a
lot worse after the ADP report,'' said Larry Milstein, head of
government and agency trading at R.W. Pressprich & Co in New
York. ``We've had such a big run. People want to take some chips
off the table ahead of a big wild card tomorrow.''
    The government reported Thursday first-time filings for
jobless benefits fell by 6,000 to 422,000 last week. Analysts
had forecast a decline to 415,000.

    On Wednesday, ADP reported that U.S. companies added 38,000
jobs in May, far fewer than the 175,000 predicted by analysts
polled by Reuters .
   The price on benchmark 10-year notes last traded
down 26/32 with their yield at 3.04 percent, up from 2.95
percent late Wednesday.
    The 30-year bond  was down 1-27/32, yielding
4.25 percent, up from 4.15 percent at Wednesday's close.

    HOW WEAK IS THE ECONOMY?
    The surprisingly weak ADP figure caused some Wall Street
economists to reduce their forecast for Friday's payrolls.
    The median forecast of economists surveyed by Reuters is
for a 150,000 increase, down from expectations of a rise of
180,000 before the ADP report.
    Signs of slowing job growth, together with a drop in oil to
$100 a barrel, have fueled a near two-month rally in
Treasuries, as traders bet inflation will stay tame and the
Federal Reserve will leave key interest rates near zero into
late 2012 to support the economy.
    Traders will also have to contend with more supply in the
near future. The Treasury Department said Thursday it will
auction next week $32 billion in three-year notes and reopen
the 10-year note issued in May by $21 billion and the 30-year
bond issued last month by $13 billion.
    For some investors, however, low-yielding U.S. government
securities are not appealing long-term investments in light of
the United States' own fiscal struggles.
    ``Treasuries are not really a place where you want to be in
the long term,'' said Yong Zhu, senior fixed-income portfolio
manager at DuPont Capital Management in Wilmington, Delaware,
which manages $25 billion in assets.
    ``This is not an asset class that gives you good return,'' he
said, when compared with higher-yielding bonds from some
developing countries that are growing faster and more
financially sound than the United States.