April 5, 2012 / 10:35 AM / 5 years ago

Rising euro zone fears drive U.S. T-notes higher

LONDON (Reuters) - Treasuries rallied strongly on Thursday as a flare-up of euro zone debt fears sent investors scurrying for safe havens, overriding expectations for strong U.S. payrolls data.

Treasury futures were half a point higher at 129-28/32, matching a steep rise in German debt futures as investors sought out low-risk liquid assets.

The closely-watched non-farm payrolls report will be released in a holiday-shortened trading session on Friday, with expectations for a repeat of last month’s strong data that would reinforce confidence in the U.S. economy.

However, investors were focused on Spain, which has been thrust into the spotlight after a poor bond auction on Wednesday exacerbated unease over whether the country can meet its deficit targets and continue funding itself at affordable levels.

“We have a sense of crisis returning to euro markets which is likely to be supportive. So, while we might get an upside surprise to the payrolls... you wouldn’t necessary be bailing out of Treasuries right now,” said Chris Scicluna, head of economic research at Daiwa Capital Markets.

Reuters polls forecast the U.S. economy added 203,000 jobs last month, indicating solid job growth for the fourth month running.

The positive expectations for the data, coupled with mounting euro zone risks and drastically reduced liquidity, could provide scope for volatile trade on Friday, traders said.

“People are going in there positioned thinking that it’s going to be a number in the low 200s,” a trader said

“People just won’t have the liquidity. If it comes as a surprise - 250 or higher, or below 200 hundred - then you’re going to have a choppy reactionary trade.”

Reporting by William James; Editing by John Stonestreet

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