NEW YORK: US government debt prices fell on Tuesday as the US manufacturing sector unexpectedly grew at its strongest pace in 10 months, reducing expectations the US economy is faltering and will need more stimulus from the Federal Reserve.
Benchmark yields, however, are still hovering at their lowest levels in nearly three months on the perception that a recession is spreading across Europe and high US unemployment remains a drag on economic growth.
The Institute for Supply Management said its index on US nationwide factory activity rose to 54.8 in April, up from 53.4 in March. Economists had predicted ISM's factory activity index, which the Fed monitors, likely slipped to 53.0 last month.
"This is a real positive for the economy because it's so strong," James Newman, head of Treasuries and agency trading at Keefe, Bruyette and Woods in New York, said of the latest US ISM factory report. "But it does come down to the jobs number on Friday."
The US Labor Department will release its April jobs report at 8:30 a.m. (1230 GMT) on Friday. Economists expect employers likely added 170,000 jobs in April after a disappointing 120,000 gain in March.
"It's not really a great number. Things have slowed down, but it's unclear by just how much," said Alan De Rose, head trader of government trading and finance at Oppenheimer and Co. Inc. In New York, of the median forecast on April payrolls.
A surprisingly weak government report on March payrolls, which was followed by a slew of disappointing economic data, shook investor confidence about the US economy. It had shown signs of gaining traction in January and February and spurred speculation the Fed might consider stepping away from its ultra loose monetary policy.
"People are concerned if you get another weak jobs report, it would be a trend," Keefe's Newman said.
The latest ISM data have stemmed fears of a rapid US economic deterioration. They followed mixed overseas readings, which showed British factory output barely grew in April but Chinese manufacturing growth accelerated at its fastest pace in 13 months.
The unexpected acceleration in domestic factory activity was mitigated by government data that showed a slim 0.1 percent rise in construction spending in March.
Trading volume was scant as financial markets in China and many euro zone and Latin American countries were closed for May Day or Labor Day.
As of 10 a.m. (1400 GMT), Treasuries volume was about half its 20-day average, according to bond broker ICAP.
There was a modest pickup in activity in advance of the latest Treasuries purchase by the Fed for its "Operation Twist" program. The US central bank bought $4.73 billion in Treasuries due in May 2020 to Nov 2021.
The Fed's $400 billion bond program, aimed at holding down mortgage rates and other long-term borrowing costs, is scheduled to end in June.
In the open market, benchmark 10-year notes traded down 9/32 in price to yield 1.95 percent, up 3 basis points from Monday's close.
The 10-year yield was still below the key 2 percent chart support level, which is also the Fed's implicit target on inflation.
Thirty-year bonds fell 27/32 in price for a 3.16 percent yield, up 4.5 basis points from late on Monday.
June 10-year T-note futures were down nearly 9/32 at 132, a level that fetched buying from hedge funds and other fast money accounts, analysts said.
US government debt prices started May on a down note after a strong April.
Barclays' total return index on Treasuries rose 1.45 percent in April, according to data that became available late on Monday, lifting the sector into positive territory for the year after logging its worst quarter since 2010 from January to March. Year-to-date, the index was up 0.14 percent.
The comeback in US government debt was led by long-dated issues, which regained their appeal due to anxiety about Europe's fiscal problems and slowing growth in the United States. Treasuries maturing in 20 years or later earned a total of 4.66 percent last month, reducing their year-to-date decline to 2.38 percent, according to Barclays.
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