US Treasuries prices dipped slightly on Thursday as a surprisingly strong report on Midwest business activity soothed worries about sluggish fourth-quarter growth after the recent federal government shutdown. Despite Thursday's decline, the bond market was on track for a second month of gains after a dismal summer.
The Institute for Supply Management-Chicago said its regional business index jumped to 65.9 in October from 55.7 last month. The reading handily beat the 55.0 forecast by analysts and was the highest since March 2011. "This was just ridiculously strong," said Eric Green, global head of rates and currency research and strategy at TD Securities in New York.
Still, Green and other analysts downplayed the importance of the data as other indicators have signalled slower demand and hiring in the aftermath of the first partial federal government shutdown in 17 years. They stuck to the view that the Federal Reserve will maintain its current $85 billion monthly bond purchases into early 2014 to support the economy. The federal government's report on Thursday of a decline in new jobless claims in the latest week added to signs of resilience in the economy. New claims fell by 10,000 to 340,000, a hair above the average estimate of 339,000 new claims.
"Things are not unravelling even though we might get another disappointing jobs report," Green said. The Labour Department will release its non-farm payrolls report for October at the end of next week. Investors are keen to gauge whether the 16-day government shutdown hurt the US employment picture.
In brisk volume, the bond market extended losses from Wednesday, when investors saw a Fed post-meeting policy statement as slightly more hawkish. Analysts said the Fed left the door open to reducing stimulus in the coming months even though policy-makers acknowledged slower growth due to the government shutdown. "They are trying to reinforce the view they are data dependent. They really don't know," said James Sarni, managing principal at Payden & Rygel in Los Angeles, which oversees $80 billion in assets.
The Fed on Thursday bought $927 million worth of Treasuries due in November 2024 to May 2030, the latest purchase in its bond-buying program. Benchmark 10-year Treasury notes were 6/32 lower in price with a yield of 2.547 percent, from 2.527 percent late on Wednesday.
But 30-year bonds pared early losses to trade flat, yielding 3.633 percent. About $251 billion worth of Treasuries changed hands as of noon Thursday, 40 percent above their 20-day average, according to ICAP, the world's biggest inter-dealer broker in US government debt. The 10-year yield has fallen around 50 basis points from a two-year high of 3 percent. The yield touched a three-month low last week at 2.471 percent.