TREASURIES OUTLOOK-U.S. bond prices sink on strong factory data
* U.S. factory activity strongest in 2-1/2 years -ISM
* Longer-dated yields set for biggest weekly rise since September
* Fed's Plosser proposes QE3 bond purchase limit
* Treasuries earn 0.49 percent return in October-Barclays
NEW YORK, Nov 1 (Reuters) - Prices for U.S. Treasuries sank on Friday as strong factory data suggested the world's biggest economy had not lost traction during a government shutdown this month, eroding safe-haven bids. Economists have worried that a federal government shutdown in the first half of the month, prompted by a congressional spending impasse, would drag on economic growth. But the Institute for Supply Management said its index on national manufacturing activity unexpectedly jumped to a 2-1/2 year peak in October. Analysts had expected a modest decline.
"The tone of this report was unambiguously strong, and the underlying message appears to be that the political turmoil in Washington earlier this month has had no impact on real economic activity," said Millan L. Mulraine, director of U.S. research and strategy at TD Securities in New York. Still, a stronger economy could convince the U.S. Federal Reserve to slow its bond-buying program in coming months, perhaps as soon as December, rather than later in 2014. "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. Still, analysts said the Fed would need more evidence of a recovery before policymakers pull back. "The market is positioning for the Fed to taper early next year. I would be surprised if they move before March," said Sharon Stark, chief fixed-income strategist with D.A. Davidson & Co in St. Petersburg, Florida.
U.S. benchmark 10-year Treasury notes were 22/32 lower in price with a yield of 2.624 percent, compared to 2.543 percent late Thursday and 2.503 percent a week ago. The 30-year bond shed over 1 point in price to yield 3.700 percent, up from 3.632 percent late in the previous session and 3.593 percent a week ago. Longer-dated yields were on track for their biggest weekly rise since early September. Bond yields have risen even though the Fed earlier this week decided to stick to its $85 billion monthly bond purchases. Policymakers, while acknowledging risks 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 on Friday he would like a cap on the amount of bonds the central bank buys under the current stimulus program, which have totaled some $1 trillion since it began in September 2012.
On the other hand, St. Louis Fed chief James Bullard said policymakers need to be confident the labor market will continue to improve before they decide to reduce 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.
(Editing by Kenneth Barry)