US Treasury debt prices fell on Tuesday after a report on factory activity showed unexpected strength and lurking inflationary pressure, suggesting the Federal Reserve may put off cutting interest rates for some time.
But prices bounced off session troughs amid doubts that the pace of growth in factory activity would be sustained, given that regional manufacturing surveys have generally surprised on the weaker side.
Traders said the market was also shifting attention back to the housing sector, in a belated response to news that the index for pending home sales in March plunged to its lowest level in four years. A drop in April US auto sales, another gauge of the economy's health, reported on Tuesday also showed the fallout from the turmoil in the housing sector.
"I am kind of surprised that the market went down as much as it did on the ISM report because housing is a bigger component of the economy than what factory production is right now," said Mary Ann Hurley, Vice President of fixed-income trading at D.A. Davidson & Co in Seattle.
The Institute for Supply Management (ISM) said its index of national factory activity rose to 54.7, above analysts' expectations for a reading of 51.0. A reading above 50 indicates expansion.
Traders said the higher reading was at odds with the findings of regional manufacturing surveys and that together with a rise in the ISM index's prices paid component to its highest level since August triggered selling on the bond market.
In late New York trade, benchmark 10-year notes were trading 3/32 lower in price for a yield of 4.64 percent, up from 4.63 percent late on Monday. Bond yields move inversely to prices. Prices earlier dipped 8/32.
"It's largely technical buying. The market is pricing in more the economy slowing down," said Frank Hsu, director of global fixed income at Fimat in New York. "In addition, Asia bought a lot of stuff before the Golden Week. The Street has realised that the market will move higher and decided to cover short positions now." Two-year notes were down 2/32 in price for a yield of 4.64 percent, up from 4.60 percent late on Monday, while five-year debt was 3/32 lower in price for a yield of 4.54 percent from 4.52 percent.
Thirty-year bonds rose 1/32 in price for a yield of 4.81 percent from 4.82 percent. Treasuries had earlier traded slightly higher on forecasts of a tighter-than-expected supply of government debt.
The government on Monday increased the amount it expects to pay down in net marketable debt in the second quarter, while its estimated borrowing needs for the third quarter came in below what Wall Street analysts had expected. Taken together, the forecasts were expected to result in tighter debt supply than had been anticipated.
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