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TREASURIES-Bond prices regain ground on Fed purchases

Monday, 1 Oct 2012 | 12:45 AM ET

* Corporate hedging also supports Treasuries

* Stronger-than-forecast ISM manufacturing index weighed

(Updates comment, prices) By Ellen Freilich

NEW YORK, Oct 1 (Reuters) - Most U.S. Treasuries edged higher on Monday, supported by Federal Reserve purchases and hedging related to corporate issuance.

Prices ticked up around midday, erasing the small losses incurred after a closely watched industry report unexpectedly showed manufacturing grew in September for the first time since May.

Treasuries firmed around the time General Electric Co

launched a $7 billion sale of three-, 10- and 30-year notes. Pricing is expected later on Monday, at which point some of the hedging could unwind.

The Fed bought $4.747 billion in longer-dated Treasuries as part of its stimulus program, which also supported the market, a trader noted. The Fed bought Treasuries that mature between November 2020 through August 2022.

Treasuries touched session lows after the Institute for Supply Management, an industry group, said its index of U.S. factory activity rose to a reading of 51.5 in September as new orders and employment picked up. A reading above 50 points to expansion. Economists had expected the index to indicate contraction.

Treasuries, which had been modestly higher before the report came out, slipped slightly in price immediately afterwards.

"The ISM manufacturing index says activity is back on the plus side in September, maybe QE3 is working after all," said Chris Rupkey, managing director and chief financial economist at Bank of Tokyo-Mitsubishi UFJ in New York.

The Federal Reserve announced its latest round of quantitative easing, known as QE3, last month.

After the ISM index was released, the benchmark 10-year Treasury reversed course to trade down 2/32 in price before paring losses to trade unchanged. Subsequently, it inched higher, leaving its yield

at 1.63 percent, midway between a low of 1.38 percent set in late July and a high of 1.89 percent reached in mid-September.

The ISM index came in "sturdier than expected," said Pierre Ellis, senior economist at Decision Economics in New York, calling the strong increase in new orders the "major good news."

The good news, however, had a downside for Treasuries because it "means that any case for a near-term 'souping-up' of QE3 is weakened," Ellis said.

A weaker picture emerged for construction spending, which the government said recorded its biggest decline in a year in August.

An element of caution may also have limited the Treasury market's losses on the ISM manufacturing reading.

"The rise above 50 is encouraging, but it should be viewed in a conservative context," said Thomas Simons, money market economist at Jefferies & Co. in New York. "The sub-50 readings in June, July and August were all very close to 50 and this month's reading remains below the 53.5 reading in May, so the broad trend in the index looks intact. Manufacturing is stuck in neutral at the moment."

In a speech in Indianapolis, Indiana, Fed Chairman Ben Bernanke said the Fed would like to see as many Americans who want jobs to have jobs while keeping the inflation rate low and stable. His remarks were in line with what markets already understood to be Fed policy and had little market impact.

(Editing by Leslie Adler)

((ellen.freilich@thomsonreuters.com)(+1 646 223 6309)(Reuters Messaging: ellen.freilich.thomsonreuters.com@thomsonreuters.net))

((-------------- MARKET SNAPSHOT AT 1230 EDT (1630 GMT) ---------------------

Change vs Current Nyk yield Three-month bills 0.085 (-0.010) 0.086 6-month bills 0.130 (-0.005) 0.132 Two-year note 100-01/32 ( unch ) 0.238 Five-year note 100-01/32 (+01/32) 0.620 10-year note 100-00/32 (+03/32) 1.624 30-year bond 98-14/32 ( unch ) 2.828 ))

Keywords: MARKETS USA BONDS/