TREASURIES-Bonds ease as factory data spurs some QE rethinking

* Fed likely to mull stronger than forecast factory data

* Central bank asset purchase program looms

* Sept construction spending unexpectedly rises

By Chris Reese

NEW YORK, Nov 1 (BestGrowthStock) – U.S. Treasuries dipped on
Monday as stronger-than-forecast manufacturing and construction
spending data had investors rethinking the size of an expected
Federal Reserve asset purchase program later this week.

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 will
certainly consider Monday’s data when it meets on Tuesday and
Wednesday.

“What killed that slight rally we had in the 10-year
Treasury note (early on Monday) was the stronger-than-expected
ISM manufacturing and construction spending,” said William
Larkin, fixed income portfolio manager at Cabot Money
Management in Salem, Massachusetts, adding “there may be a
dial-back on the scale or tone of QE2 based on some of the
stronger economic results.”

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. For details see
[ID:nN01133257].

“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 (US10YT=RR: ) on Monday were trading
6/32 lower in price to yield 2.63 percent, up from 2.61 percent
late on Friday, while 30-year bonds (US30YT=RR: ) were 16/32
lower to yield 4.02 percent from 3.99 percent.

Analysts pointed to an unexpected rise in construction
spending in September as further evidence the economic recovery
may be picking up, although that was tempered by a smaller than
expected rise in consumer spending in September and a dip in
income for the first time in 14 months.

Expectations for the total size of the quantitative easing
program have widely ranged from $250 billion to $2 trillion.

George Goncalves, head of U.S. rates strategy at Nomura
Securities in New York, said his firm went short on Treasuries
a few weeks ago after 10-year yields failed to dip below the
2.30 percent level.

“Positive technicals also have been broken favoring a
longer-term bearish tilt — but given all of the uncertainty
about how things may transpire, we would not add to shorts
until we get the QE2 reaction out of the way,” Goncalves said.

Still, pending quantitative easing was not the only game in
town, and participants said the Treasury market flavor this
week could also be heavily influenced by the results of
mid-term U.S. government elections on Tuesday and October
non-farm payrolls data to be released on Friday.

(Additional reporting by Ryan Vlastelica; Editing by Andrew
Hay)

TREASURIES-Bonds ease as factory data spurs some QE rethinking