TREASURIES-Fears of slowdown send 10-yr yield below 3 pct

* Weak jobs, factory data push 10-year yield below 3 pct

* Yield curve flattest since early December

* Economic worries renew speculation Fed will launch QE3

* 30-year yield also hits 6-month low, edges toward 4 pct

By Emily Flitter

NEW YORK (Reuters) – Treasury yields fell Wednesday as prices rose, but traders were wary of the rally’s speed, and some wondered whether a pullback might be in store for the market Thursday.

Prices soared as data on private payrolls and manufacturing came in well below expectations, causing economists to scramble to revise lower their forecasts for Friday’s May jobs report.

The 10-year Treasury yield broke below the significant 3 percent level and hit a fresh six-month low. The 30-year yield, which is considered an indicator for inflation expectations, also traded at its lowest level since early December.

But David Coard, head of fixed income sales and trading at Williams Capital Group in New York, said he was preparing for a possible reversal of some of Wednesday’s price action on Thursday.

“We’ve moved a long way pretty quickly today — 30s are up over a point (in price),” he said. “Unless we see more weakness tomorrow from economic data or you get more troubling news out of the situation in Europe I think you’re going to get a pullback on Treasuries.”

The Treasury market sprinted out of the gate on the first trading day in June after a solid May. Barclays Capital’s Treasury total return index rose 1.56 percent last month.

Reduced growth and inflation expectations hurt results on Treasury Inflation Protected Securities. Barclays’ TIPS index registered a slim 0.31 percent gain in May.

Benchmark 10-year Treasury notes last traded up 29/32 in price. Their yield was last at 2.96 percent, a level not seen since early December. On Tuesday, the yield ended at 3.05 percent, a key resistance level that had held in the prior four sessions.

 

SPRING SLOWDOWN

Wednesday’s data suggested the economy is facing more than just a soft patch.

Data from ADP Employer Services showing that U.S. private employers added a paltry 38,000 jobs in May and a slide in the Institute for Supply Management’s survey on national manufacturing overshadowed optimism that Greece will obtain fresh aid from the European Union and the International Monetary Fund.

The ADP data caused some economists to cut their forecasts on the Labor Department’s May payrolls survey to be released at 8:30 a.m. Friday.

Credit Suisse downgraded its forecast increase for May payrolls to 120,000 from 185,000.

The latest median forecast on the May payroll reading is for an increase of 180,000, down from a gain of 244,000 in April, according to economists polled by Reuters before Wednesday’s ADP report.

ISM said its index of national factory activity fell in May to the lowest level since September 2009.

 

ANOTHER ACRONYM: QE3

The weak data drove speculation that the Federal Reserve will step in again to stimulate growth after its second round of stimulus, known as QE2, is completed at the end of this month.

“What you have received today is fueling the perception that the economy is rolling over. You have to look at these economic data that point to lower yields,” said Eric Green, chief of U.S. rates research and strategy at TD Securities in New York.

“If this is rolling over, it will fuel speculation that we could see QE3 some time early next year,” Green said.

The chances, however, of the Fed engaging in another round of Treasury purchases are very low, he noted, adding that he expects the slowdown to be temporary and that growth and inflation will reaccelerate in the second half of the year. The 30-year Treasury bond jumped 1-12/32 in price for a yield of 4.15 percent.

Growing perception of a U.S. growth and inflation slowdown narrowed the spread between short-dated and long-dated yields. The two-to-10-year part of the yield curve flattened to 253 basis points, a level not seen in about six months.