Traders of US Treasury securities pointed to low volume on Monday to explain a widely swinging market, in which Treasury prices rose early on and then fell, ending the day with price losses and yield increases.
The traders said most market participants were sitting out the beginning of the week in anticipation of the Federal Open Market Committee meeting, which ends on Wednesday when the Fed is expected to announce a new Treasury purchase program to stimulate the economy.
Other news events, including new data on the US economy and the outcome of hotly contested midterm elections late on Tuesday, are unlikely to move the market in a significant way ahead of the Fed announcement, analysts said. "I still expect people to sit on the sidelines until the larger risk event," said Scott Sherman, interest-rate strategist at Credit Suisse in New York. "I think people are way more focused on a much more imminent effect on the Treasury market being the outcome of the FOMC meeting on Wednesday. You wouldn't want to really react to the elections when another, more important event coming the day after."
Sherman said low volume was the cause of choppy price action Monday, which left Treasuries to close lower on the day. A note to clients from CRT Capital Group in Stamford, Connecticut said volume in the market was 75 percent of the 10-day moving average for much of the day, rising to 88 percent of the 10-day average near the market's close. "The Treasury market is in a holding pattern trying to figure out the size of quantitative easing," said Raymond Remy, head of US fixed income at Daiwa Securities in New York.
That calculation - determining the size of the Fed's new purchase program - grew more complicated on Monday following stronger-than-forecast data on manufacturing and construction spending. While few were actually changing their forecasts for the scope of the Fed's next round of quantitative easing, investors agreed the central bank's policy-making committee would certainly consider Monday's data when it meets on Tuesday and Wednesday.
The Institute for Supply Management said its index of national factory activity rose to 56.9 - the highest since May and well above the 54.0 median forecast of 77 economists surveyed by Reuters - from 54.4 in September. A reading above 50 indicates expansion in the sector.
"ISM is one of the more important pieces of data out there, and the Fed will be looking at it as it prepares its comments," said David Kupersmith, head trader at Third Wave Global Investors in Greenwich, Connecticut. "One number won't impact the amount of QE we could get, but the amount of manufacturing activity is important and this is the best gauge of that." The market generally has priced in a Fed asset purchase program of about $100 billion per month for five months, with an open mandate to purchase more. Any central bank program of lesser size would likely undermine bond prices and lead to higher yields.
Benchmark 10-year notes on Monday were trading 8/32 lower in price to yield 2.64 percent, up from 2.61 percent late on Friday, while 30-year bonds were 11/32 lower to yield 4.01 percent from 3.99 percent.
Expectations for the total size of the quantitative easing program have widely ranged from $250 billion to $2 trillion. Tempering the stronger construction and manufacturing data were a smaller than expected rise in consumer spending in September and a dip in income for the first time in 14 months.