US Treasuries ended the first day of the fourth quarter slightly higher on Monday after an earlier selloff caused by strong US manufacturing data ebbed and as stocks also gave up gains. The government debt showed little reaction after Federal Reserve Chairman Ben Bernanke defended the central bank's controversial bond purchase program, saying the Fed's actions are necessary to support a flagging economic recovery.
Bonds yields earlier hit session highs after a closely watched industry report unexpectedly showed manufacturing grew in September for the first time since May, although the weakness faded in the afternoon. "There was a surprise in the ISM, after Chicago on Friday a lot of people were looking to some downside risk to that number," said Richard Gilhooly, interest rate strategist at TD Securities in New York.
The Institute for Supply Management (ISM), an industry group, said its index of US factory activity rose to 51.5 in September as new orders and employment picked up. A reading above 50 points to expansion. Economists expected the index to indicate contraction.
Pierre Ellis, senior economist at Decision Economics in New York, called the strong increase in ISM's new orders the "major good news," saying the index was "sturdier than expected." The data came after an indicator on Friday showed business activity in the US Midwest contracted in September for the first time in three years. Global indicators also suggested hurdles to global growth as euro zone factories suffered their worst quarter since early 2009 and as China lost steam.
Benchmark 10-year note yields have rallied close to the bottom of their recent two-month range in the past two weeks, as disappointing economic data added to doubts the recovery will be sufficient to put a dent in the stubbornly high jobless rate. The notes were last up 3/32 in price to yield 1.62 percent, above the recent low of 1.54 percent on September 4 and below the recent high of 1.89 percent on September 14, the day after the Fed announced its third quantitative easing program.
The next data major data release for the market will be Friday's closely watched employment number, which is expected to show that employers added 113,000 jobs to their payrolls in September, according to the median estimate from 100 economists polled by Reuters. Reports that Japan will consider buying foreign bonds, including US Treasuries, in an effort to hold down the yen added a bid for the debt.
Japan's new finance minister Koriki Jojima said on Monday the idea of the central bank buying foreign bonds needs to be considered carefully, adding that there is no change in the governments readiness to take action against excessive foreign exchange movements. Fed purchases as part of its Operation Twist program also helped support the market. The central bank bought $4.747 billion in debt due between 2020 and 2022, out of the $11.499 billion offered, as part of this program, which is designed to lower longer-term borrowing rates. Treasuries prices also firmed around the time General Electric Co launched a $7 billion sale of three-, 10- and 30-year notes.