Bond prices fall as US services data surprise

U.S. Treasurys

Prices for U.S. Treasurys fell on Tuesday, with stronger-than-expected U.S. service sector data suggesting the world's biggest economy may have weathered last month's partial government shutdown better than feared.

The Institute of Supply Management non-manufacturing survey index rose to 55.4 in October from 54.4 in September. A reading above 50 in the index indicates an expansion in the U.S. service sector. Economists polled by Reuters expected a reading of 54.0

Prices for U.S. benchmark 10-year Treasury notes dipped 16/32 in price on Tuesday to yield 2.666 percent, compared to a yield of 2.6035 percent late on Monday.

The Treasurys market is now turning on one central question: When will the U.S. Federal Reserve slow its $85 billion per month bond-buying program?

Despite expectations for a September taper, the central bank has instead held firm to its course, although it did take on a more hawkish tinge after its most recent policy meeting last month.

Fed's Rosengren: Seeking sustainable growth

"It's just to taper or not to taper,'' said Wilmer Stith, portfolio manager of the Wilmington Broad Market Bond Fund. "At the end of each day, that's going to be the primary focus.''

Fed Chairman Ben Bernanke has repeatedly said that the Fed's decision will depend on data showing the health of the world's biggest economy.

Other recent Fed speakers have emphasized that message, with three separate Fed officials on Monday suggesting the Fed should only pull back asset purchases on clearer signs of improvement in the economy and should act slowly when it does slow bond buys.

Perhaps the most significant upcoming data point for potential policy changes will be Friday's nonfarm payrolls report for the month of October.

But that data itself will be problematic, considering that a Congressional impasse shut down most of the federal government for the first half of last month.

A weak number, noted Ian Lyngen, senior government bond strategist at CRT Capital Group, "will simply be dismissed as the transitory influence of the government shutdown and civilian furloughs; but on the other hand, if the release comes in above consensus, it will be read as that much stronger given the weight of the shutdown.''

Recent stronger-than-expected manufacturing data have underscored how hard it will be to judge the shutdown's effect on the economy, although many analysts still worry about a drag on growth.

More data are on the way in the week, including data on the U.S. service sector at 10 a.m. ET and third-quarter gross domestic product figures on Thursday.

But the payrolls figure will be likeliest to guide the market, at least in the short term.

Fed policymakers want to see the unemployment rate dropping closer to 6.5 percent from the current 7.2 percent, but economists in a Reuters survey expect that rate to have edged up in October to 7.3 percent.

—By Reuters