TREASURIES-U.S. bond prices slide on upbeat factory data
* U.S. factory activity strongest in 2-1/2 years -ISM
* Fed's Plosser proposes QE3 bond purchase limit
* Treasuries earn 0.49 percent return in October -Barclays
NEW YORK, Nov 1 (Reuters) - U.S. Treasuries prices fell on Friday as an encouraging report on domestic manufacturing indicated the economy overcame a drag from a government shutdown in October, which spurred selling in bonds for a third consecutive session. The report raised hopes that U.S. economic growth in the fourth quarter might not be impacted as badly by the shutdown as some traders had expected. Still, the rosier data also revived some worries the Federal Reserve might consider scaling back its stimulative bond purchases earlier than expected - at its December meeting - rather than early in 2014, analysts said. "There is a feeling that they might taper in December. It has gained a little steam, but that's not the consensus," said Matt Duch, a portfolio manager at Calvert Investments in Bethesda, Maryland. The Institute for Supply Management said its index on national manufacturing activity unexpectedly edged up to 56.4 points in October, a 2-1/2 year peak. Analysts had projected a modest decline to 55.0 from 56.2 in September. The bond market started the first trading day in November on a sour note with benchmark yields rising to their highest levels in 1-1/2 weeks. It just came off a second straight month of gains, recouping some of the losses from this summer's sharp sell-off due to fears about the Federal Reserve shrinking its bond-purchase program by late this year. The Treasuries sector earned 0.48 percent in total returns in October, reducing its year-to-date loss to 1.54 percent, according to an index compiled by Barclays. But it lagged other higher-yielding U.S. bonds. Junk bonds, for example, gained 2.51 percent last month. Treasuries yields have further moved above the high-end of their recent trading range since a surprisingly strong report on U.S. Midwest manufacturing. The Institute for Supply Management-Chicago said Thursday its regional business index jumped to a 2-1/2-year high in October, defying a forecast of a modest decline stemming from the 16-day partial government shutdown last month.
Benchmark 10-year Treasury notes were 15/32 lower in price with a yield of 2.600 percent, up nearly 6 basis points from late Thursday and 10 basis points from a week ago. Bond yields have risen even though the Fed decided to stick to its $85 billion monthly bond purchases earlier this week. Policy-makers, while acknowledging the risk from the government shutdown, offered no promise that they would not taper their third round of quantitative easing in the coming months. Philadelphia Fed President Charles Plosser told CNBC television he would like a cap on the amount of bonds the central bank buys for QE3, which have totaled some $1 trillion since it began in September 2012. On the other hand, St. Louis Fed chief James Bullard said policy-makers need to be confident the labor market will continue to improve before they decide on reducing bond purchases. The Federal Reserve on Friday bought $1.565 billion of Treasuries maturing February 2038 through February 2043 as part of its latest monetary stimulus program, the New York Fed said on its website. On Tuesday, it purchased $1.46 billion of these comparable debt maturities for its QE3 program.