TREASURIES-Weak data lifts bonds; 10-year yield below 3 pct

By Richard Leong

NEW YORK (Reuters) – U.S. Treasury debt prices rallied Wednesday after weak data on jobs and factory activity drove fears that the economic recovery could be derailed, pushing the yield on the 10-year note below 3 percent for the first time in nearly six months.

The data, which came in well below expectations, suggested that the economy is facing more than just a soft patch, driving speculation that the Federal Reserve will step in again to stimulate growth after its second round of quantitative easing, 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 added, noting that he expects the slowdown to be temporary and that growth and inflation will reaccelerate in the second half of the year.

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

Greece, which is fighting to avoid a debt default, should complete talks by the end of the week with inspectors from the EU and IMF on a medium-term budget plan plus a vital next slice of international aid, sources close to the negotiations said on Wednesday.

The gains in private employment reported by ADP were far below the 175,000 increase predicted by analysts polled by Reuters . The April increase was revised down to a 177,000 from the originally reported 179,000.

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 on May payrolls to 120,000 from 185,000.

The latest median forecast on the government’s 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.

In addition, ISM said its index of national factory activity fell to 53.5 in May, the lowest level since September 2009. Analysts had predicted a reading of 57.7.

“It is disappointing and continues a steady drip, drip, drip of unbelievably, consistently weaker data points,” said David Dietze, chief investment strategist at Point View Financial Services in Summit, New Jersey.

The price on benchmark 10-year notes last traded up 22/32 from its 3 p.m. close Tuesday.

The yield was last at 2.97 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.

The 30-year Treasury bond jumped 1-3/32 in price for a yield of 4.15 percent, also the lowest level since early December.

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 235 basis points, a level not seen in about six months.