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Treasuries Extend Upward Move On Disappointing Economic Data

Following the strong upward move seen in the previous session, treasuries saw some further upside during the trading day on Wednesday.

Bond prices moved higher early in the session and remained positive throughout the session. As a result, the yield on the benchmark ten-year note, which moves opposite of its price, fell by 2.3 basis points to 1.953 percent.

With the continued decrease on the day, the ten-year yield once again ended the session at its lowest closing level since Election Day of 2016.

The strength among treasuries came as a batch of largely disappointing U.S. economic data reinforced expectations for a near-term interest rate cut by the Federal Reserve.

Initial buying interest was generated in reaction to a report from payroll processor ADP showing private sector job growth reaccelerated in the month of June but still came in below economist estimates.

ADP said private sector employment climbed by 102,000 jobs in June after rising by an upwardly revised 41,000 jobs in May.

Economists had expected employment to increase by about 140,000 jobs compared to the addition of 27,000 jobs originally reported for the previous month.

"Even with the US-China trade talks back on track (for now at least) the evidence of a slowdown in employment growth should still be enough to persuade the Fed to cut rates in either July or September," said Paul Ashworth, Chief U.S. Economist at Capital Economics.

CME Group's FedWatch tool shows an interest rate cut of at least 25 basis points at the Fed's July meeting is priced into the markets, although Ashworth said expectations of a 50 basis point cut "seem misplaced."

Treasuries saw some further upside after a report from the Institute for Supply showing a notable slowdown in the pace of service sector growth added to the optimism about a rate cut.

The ISM said its non-manufacturing index dropped to 55.1 in June from 56.9 in May, hitting its lowest level since a matching reading in July of 2017.

While a reading above 50 still indicates growth in service sector activity, economists had expected the index to show a more modest decrease to 55.9.

A separate report released by the Commerce Department showed the U.S. trade deficit widened by more than anticipated in the month of May, as the value of imports jumped by much more than the value of exports.

The Commerce Department said the trade deficit widened to $55.5 billion in May from a revised $51.2 billion in April. Economists had expected the trade deficit to widen to $54.0 billion.

The wider trade deficit came as the value of imports surged up by 3.3 percent to $266.2 billion compared to a 2.0 percent jump in the value of exports to $210.6 billion.

Andrew Hunter, Senior U.S. Economist at Capital Economics, said the wider than expected deficit suggests net trade was a "slightly bigger drag on second-quarter GDP growth than we had previously anticipated."

"Despite the recent ceasefire agreed between Presidents Donald Trump and Xi Jinping, we still think it is slightly more likely than not that the trade dispute with China will ultimately escalate further," Hunter said.

He added, "The upshot is that net trade is likely to remain a modest drag on growth over the second half of this year, which we expect to compound a sharp slowdown in domestic demand growth."

Following the holiday on Thursday, trading on Friday is likely to be driven by reaction to the Labor Department's closely watched monthly jobs report.

Employment is expected to increase by 160,000 jobs in June after rising by 75,000 jobs in May, while the unemployment rate is expected to hold at 3.6 percent.

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