TREASURIES-Bonds slip on gain in manufacturing as govt shuts down
* Manufacturing indexes, stocks gain dent demand for bonds
* U.S. manufacturing grew at fast pace in 2-1/2 years - ISM
* Italy, Spain, Portugal debt rally hurts bid for Treasuries
* Bond market more focused on debt ceiling than shutdown
* U.S. 1-month bill sale fetches highest rate since November
(Updates market action, adds comments)
By Ellen Freilich
NEW YORK, Oct 1 (Reuters) - U.S. Treasuries prices fell on
Tuesday as strong manufacturing indexes, stock market gains, and
a rally in peripheral European debt all dented demand for
Treasuries, still seen as a safe-haven despite a partial U.S.
government shutdown and impending debt ceiling battle.
U.S. manufacturing grew last month at its fastest pace in
nearly 2-1/2 years. Manufacturing grew in Italy and Spain, the
euro zone's third and fourth-largest economies, as it did in
Germany, Europe's largest economy. U.S. stocks rose despite
the U.S. government shutdown.
The debt of Italy, Portugal and Spain rallied on signs the
Italian government would muster enough support in a confidence
vote to ward off a new round of hotly contested elections.
The market impact from a stalemate over the U.S. federal
budget that caused the first partial U.S. government shutdown in
17 years was mainly seen at the short-end of the maturity curve
when a U.S. one-month bill sale got the highest rate since
"Globally, manufacturing survey data was relatively strong.
The U.S. number beat expectations and last month's number and
that created some optimism," said Jake Lowery, Treasury trader
at ING U.S. Investment Management in Atlanta.
Reports that Italy's government looked likely to survive a
confidence vote helped peripheral bonds, he noted.
"That reduced demand for safe-haven assets like Treasuries
and German bunds," Lowery said.
The partial shutdown of the U.S. government, which could put
up to 1 million workers on unpaid leave and hurt U.S. and global
growth, prompted a variety of views.
Lowery said for now, bonds were paying more attention to the
debt ceiling deadline than to the government shutdown. Treasury
bills maturing on Oct. 31, soon after the Oct. 17 deadline cited
by the U.S. Treasury Department for raising the debt ceiling,
have "cheapened significantly," he said.
If Congress agrees to a new funding bill soon, the shutdown
would have relatively little impact on the world's largest
But without that, markets could soon feel an information
deficit as the shutdown deprives them of the fresh government
data on the economy to which they are accustomed.
"People say the bond market does not move much on the
monthly economic reports, but boy when we don't have them, the
tone of trading - if not the volume - drops dramatically," said
Chris Rupkey, managing director and chief financial economist at
Bank of Tokyo-Mitsubishi UFJ in New York.
"Wall Street clients move money and buy and sell securities
when they change their view. Without the government economic
reports, there is no reason to change your view," he said.
"A bad quarter for fixed income trading and commissions is
going to get even worse in the days ahead," Rupkey said.
Rupkey said the shutdown "could last three weeks like the
"They really can't start it again without resolving the debt
ceiling limit problem, and (the deadline for)that, according to
Treasury, is October 17," he said.
Amid the uncertainty created by the U.S. government shutdown
and imminent debt ceiling battle, Wells Fargo Advantage Funds
chief fixed-income strategist James Kochan said cash remained
expensive relative to nominal Treasuries.
With the Federal Reserve in no hurry to raise short-term
interest rates, "cash will underperform for another two years,
as it has for the past four," he said.
Predictions of negative returns for bonds once the Fed
starts to tighten monetary policy do not give enough weight to
the role "today's exceptionally steep yield curve could play in
future bond performance," Kochan said.
In six postwar periods of Fed tightening, a steep yield
curve has flattened "significantly" by the end of the tightening
cycle, he observed. The steep yield curve plus coupon income ive
could still give investors positive returns even if bond prices
decline somewhat, he said.
The Treasuries market earned 0.7 percent in total returns in
September, its first monthly gain since April. The recovery last
month helped lift the market's third-quarter performance into
positive territory, also generating a 0.7 percent return. In
turn, this reduced its year-to-date loss to 2.01 percent. The
loss was tied to a sharp summer sell-off due to fears that the
Federal Reserve might reduce its stimulus later this year,
according to an index compiled by Barclays.
On Tuesday, Day 1 of the U.S. government shutdown, benchmark
10-year Treasuries notes fell 8/32 in price. Their
yields rose to 2.65 percent from 2.61 percent late on Monday.
The 10-year yield touched its lowest level in seven weeks on
Monday, spurred by last-minute safe-haven bids before the
partial government shutdown.
ONE-MONTH BILL RATE JUMPS
While reaction to the government shutdown has been muted so
far, investors worry the conflict in Washington would cause a
government default if lawmakers do not agree to raise the $16.7
trillion borrowing limit, expected to be reached on Oct. 17.
Investors seemed reluctant to load up on ultra short-dated
U.S. debt, which might face turbulence as the debt ceiling
deadline looms. At Tuesday's $35 billion sale of U.S. one-month
T-bills, the Treasury paid 0.12 percent to investors, the
highest rate paid on this debt maturity since November.
On the open market, the interest rate on one-month T-bills
rose to 0.08 percent, up 5.5 basis points on the day
and on track for its biggest single-day rise since late July
2011 in the days of the first debt ceiling showdown between
President Obama and top Republican lawmakers.
For now, many traders do not expect the U.S. government to
stop meeting its debt obligations, which are held in pension
funds, retirement accounts and central banks worldwide.
"It's way too early to price in a technical default. That's
a very long shot," said Mike Cullinane, head of Treasuries
trading at D.A. Davidson in St. Petersburg, Florida.
In the derivatives market, the cost to insure against a U.S.
default retreated from its highest level in more than four
months. Investors would have to pay about 31,995 euros annually
to insure 10 million euros worth of Treasuries against a default
in five years, down from 33,217 euros on Monday's close,
according to data from Markit.
Early casualties of the partial government shutdown were
official economic reports. The Commerce Department said on
Tuesday it postponed the release of its September reading on
The Labor Department said last week it will not publish the
closely-watched employment report, which was slated for release
on Friday, if a shutdown occurs. But it will put out its weekly
jobless claims report on Thursday.
As a result, investors will rely on privately produced
economic indicators, which include ADP's private employment
report on Wednesday.
Economists estimated each week of reduced federal services
would take away 0.1 percentage point of the U.S. gross domestic
(Additional reporting by Richard Leong and Daniel Burns;
Editing by Theodore d'Afflisio, Krista Hughes and Bob
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