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BLBG: Treasuries Fall for First Time in Three Days After Jobs Report
By Dakin Campbell

Oct. 3 (Bloomberg) -- Treasuries declined for the first time in three days after a government report showed the U.S. lost the most jobs in five years in September, while the unemployment rate remained at 6.1 percent.

Bonds are still headed for a sixth week of gains on speculation a worsening credit crunch will prompt the Federal Reserve to reduce interest rates to prevent a recession. Today's decline comes as the U.S. House of Representatives is set to vote on the Senate's financial-rescue bill.

``The attention seems to be shifting to a focus about what the economy is doing,'' Mary Ann Hurley, vice president of fixed-income trading in Seattle at D.A. Davidson & Co., said before the report. ``We definitely have a lot of bad economic news priced into the market, so when we get something that is not as bad or less bad as expected, we could get a sell-off.''

The yield on the two-year note rose 9 basis points, or 0.09 percentage point, to 1.70 percent at 8:39 a.m. in New York, according to BGCantor Market Data. The 2 percent security due in September 2010 fell 6/32, or $1.88 per $1,000 face amount, to 100 19/32. The 10-year note little changed at 3.63 percent.

Payrolls fell by 159,000, more than anticipated, after a 73,000 decline in August, the Labor Department said today in Washington. The jobless rate, the last one reported before the presidential election, remained at 6.1 percent. Hours worked reached the lowest level since records began in 1964.

House to Vote

Futures on the Chicago Board of Trade showed a 100 percent probability before the jobs report that the Fed will reduce its target rate by a half-percentage point at its Oct. 29 meeting. Traders saw no chance a month ago.

The $700 billion rescue legislation was sent to the House after the Senate approved it Oct. 1 in a 74-25 vote. The plan authorizes the government to buy troubled assets from financial institutions rocked by record home foreclosures. It includes $149 billion in tax breaks, a higher limit on federal bank- deposit insurance and a change in securities laws.

``It's the House vote that is really going to command the attention of the markets,'' said Carl Steen, a market analyst in New York at MFR Inc., an economic consulting firm. ``It's wide open what happens from there.''

Treasury yields should rise through year-end as the market lowers expectations that the Fed will cut rates and begins to consider the Treasury supply needed to pay for a rescue of financial firms, Steen said.

`Extremely Tight Conditions'

Policy makers are trying to thaw credit markets that have frozen as banks became less willing to lend. Tighter borrowing conditions caused Washington Mutual Inc. to become the largest U.S. bank failure in history and led Merrill Lynch & Co. and Wachovia Corp. to sell themselves to avoid a similar fate.

Kansas City Fed bank President Thomas Hoenig said late yesterday the economic situation is ``very serious.'' The U.S. may fall into a recession as the financial rout deepens, the International Monetary Fund said yesterday.

The difference between what banks and the Treasury pay to borrow for three months, the so-called TED spread, was 379 percentage points, the most since Bloomberg began compiling the data in 1984

``We'll see extremely tight conditions in the money market through the end of the year,'' said Vincent Boberski, senior vice president of portfolio strategies at FTN Financial in Memphis. ``It's difficult to see the short end of the curve giving back a significant amount.''

The London interbank offered rate, or Libor, the rate banks charge each other for three-month dollar loans, rose for a fifth day, climbing 12 basis points to 4.33 percent, the highest since Jan. 10, data from the British Bankers' Association showed.

To contact the reporter on this story: Dakin Campbell in New York at dcampbell27@bloomberg.net