Treasuries take off after surprisingly poor private payrolls number; 10-year yield crosses 3%

By Kenneth Lim

Boston, June 1 - U.S. Treasuries leaped higher Wednesday after a surprisingly weak private payroll report forced investors to lower their expectations for a key labor situation report.

The benchmark 10-year yield crossed below the technically significant 3% level to close at 2.94%, down by 12 basis points. The 30-year yield was 4.14% at the end of the day, down by 9 bps. The two-year yield slipped 2 bps to 0.45%.

"It was a 'lookout below' kind of day in the Treasury market," said Guy LeBas, chief fixed income strategist at Janney Montgomery Scott. "We had yields move by the highest margin in several months largely on several rounds of economic data."

ADP Employer Services on Wednesday reported that private payrolls increased by just 38,000 in May, significantly less than the 175,000 that economists had been predicting.

The weak data forced many in the Street to cut their forecasts for Friday's key non-farm payroll and unemployment rate numbers. LeBas's new estimate for non-farm payrolls is now a 136,000 increase, cut from the previous forecast of 209,000.

"The poor payrolls performance is just out of the blue," he said.

The weak data could mean that there were more one-time factors in April than expected, or the severe weather in the Mid-West over the past few weeks may have had a larger impact on the economy than foreseen, LeBas said.

The market is now operating in a highly uncertain environment, with investors gravitating toward extreme positions. Citing a J.P. Morgan survey that showed a growing proportion of investors either short or long the market as opposed to neutral, LeBas said the market was either "digging a hole that's hard to get out of or climbing a ladder that's hard to get down from, depending on how you look at it."

The market could see some selling on Thursday ahead of the Friday data, and 2.9% in the 10-year yield is the next technical resistance level, LeBas said.

"I think we'll see some profit taking tomorrow," he said. "It's going to be the longs taking risk off heading into the payroll numbers."

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