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Treasury Yields Slide On Weak Jobs Data As Bond Signals Rattle Market Nerves

Benchmark 10-year note yields are holding at multi-month lows ahead of a key jobs reading Friday and $126 billion in new auctions next week.

U.S. Treasury bond yields slumped lower Wednesday as investors continue to price in weaker growth prospects ahead of a key week of auctions and signals of slowing supply over the coming months.

Private employers added far fewer-than-expected new jobs last month, payroll processing group ADP said Wednesday in a release that followed two consecutive months of decline in ISM manufacturing activity readings. 

Friday's non-farm payroll report is expected to show 880,000 new jobs were created last month, with analysts looking for consistent 800,000-plus readings in order to induce the Federal Reserve to signal the first tapering of its $120 billion in monthly bond purchases

However, today's softer ADP data, as well as companies ranging from General Motors  (GM) - Get General Motors Company (GM) Report to Apple  (AAPL) - Get Apple Inc. (AAPL) Report, Amazon  (AMZN) - Get Amazon.com, Inc. Report and Tesla  (TSLA) - Get Tesla Inc Report cautioning that supply chain disruptions would impact revenue growth and margin prospects in the months ahead, has some investors re-thinking growth prospects in the world's biggest economy. 

Benchmark 10-year Treasury note yields, which move in the opposite direction of prices, fell to 1.136% in early Wednesday trading before rebounding to 1.2% as Fed Vice Chairman Richard Clarida said Wednesday, although he did add he would support announcing a moderation of asset purchase "later this year."  

ING's senior rates strategist Antoine Bouvet, however, says the signals being sent by the bond market are in some ways distorted supply and demand dynamics, noting both thinner summer liquidity and the Fed's purchasing impact.

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"I'm not totally discounting the potential economic worries, but by and large the reason why interest rates have dropped so much is because of central bank intervention," Bouvet said.

"As much as I think interest rates could drop further by the end of the year, rates will soon more accurately reflect economic fundamentals when some of the central bank purchases, in particular the Fed, are phased out," he added.

Paltry returns haven't dissuaded fund mangers in the meantime, however, according to Bank of America's recent 'Flow Show' report, with bond funds attracting $12.7 billion in inflows last week, up 51.2% from the previous period.

The falling yields also come just ahead of a key series of Treasury auctions next week that will see $126 billion in new bond sales, including $41 billion in 10-year notes on August 11 and $27 billion in 30-year bonds the following day.

The Treasury said Wednesday that it plans to sell $673 billon in new bonds this quarter as part of a $1.5 trillion second-half funding target that is predicated on lawmakers lifting a suspension of the debt ceiling, which expired last week at $22 trillion. 

However, the Treasury also noted that it may begin decreasing the amount of bonds if offers for auction over the final months of the year, a change that could offset the impact of any change in the Fed's asset purchase program.