TREASURIES-Bonds rebound on stocks weakness, jobs rethink

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Tuesday September 07, 2010 02:30:13 PM GMT

*U.S. stock index futures fall, reviving safe haven bid

*Rethink about fleeting U.S. jobs relief

*Traders brace for $33 billion 3-year notes sale

NEW YORK, Sept 7 (Reuters) - Treasuries rebounded on Tuesday after three straight sessions of losses, as ebbing confidence in the stock market restored a safe haven bid for government bonds.

Investors also reassessed their initial relief about a less somber than expected U.S. monthly jobs report on Friday.

The jobs data had momentarily assuaged fears about the risk of a double dip recession and accelerated appetite for stocks and other riskier assets, to the detriment of less risky government bonds.

But U.S. stock index futures fell on Tuesday, after a report on the European banking system reawakened fears about the region's financial health. A Wall Street Journal report raised questions about bank stress tests carried out in the euro zone earlier in the year.

"People have come back to work today feeling they were a little over exuberant in the reaction to Friday's payrolls number. It was not as a bad as expected but certainly not a harbinger of gangbusters economic growth going forward," said Thomas Simons, money market economist at Jefferies & Co in New York.

U.S. employment fell for a third straight month in August, but by less than expected, while within the report, private payrolls growth was surprisingly high. See [ID:nN03273418].

Bond markets observed a recommended close on Monday for the U.S. Labor Day public holiday, which marks the unofficial end of the summer. Typically, trading volumes rise in the early part of this week.

As U.S. stock index futures slipped, that restored some safe haven bidding for Treasuries.

"Consistent with the price action in equities, bond yields are generally lower," wrote T.J. Marta, founder and market strategist with research firm Marta on the Markets in Scotch Plains, New Jersey in a research note.

The benchmark 10-year Treasury note's price, which moves inversely to its yield, rose 16/32 for a yield of 2.64 percent <US10YT=RR>, falling back from Friday's three-week highs around 2.77 percent. That rise in yields failed to breach a key near-term ceiling of about 2.79 percent which some analysts had cited.

Late on Friday, the 10-year note yield was at 2.70 percent.

The 30-year Treasury bond climbed 1-12/32 in price for a yield of 3.71 percent <US30YT=RR>, versus 3.78 percent late Friday.

Traders were readying for a $33 billion auction of 3-year Treasury notes scheduled for 1 p.m. The 3-year note was trading up 4/32 in price for a yield of 0.76 percent.

"Probably heading into the auction we will sell off a little bit, but I think it will go well," said Simons. Since the Federal Reserve is expected to keep official interest rates near zero for a long period to help stoke economic growth, shorter maturity government notes are in strong demand, analysts say.

Auctions of $21 billion in 10-year notes and $13 billion in 30-year bonds will follow later this week.

(Reporting by John Parry; Editing by Chizu Nomiyama)

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