The Institute for Supply Management manufacturing PMI beat forecasts of 55.3 with a print of 56.4 shaking off economist worries over the government shutdown. “The Institute for Supply Management factory data was a little on the strong side, so it puts the tapering fear back into the market and we start to get higher yields,” said William Larkin, a fixed-income portfolio manager at Cabot Money Management.
As a result, the US 10Y treasury yields increased to three-week highs. Since October 25, yields have increased 11 bps versus an 18 bps decline over the last two weeks. Federal Bank of Saint Louis President James Bullard has voiced is opinion many times in regards of cutting the massive $85 billion bond purchasing program. Bullard said that the labor market gains and “underlying strength” in the economy should entice a taper.
Primary treasury dealers cut holdings by the most in over a year for the five-day period ending on October 23. Over $37.7 billuon, or 25.8 percent, of dealer holdings were trimmed to $108.3 billion. According to Federal Reserve data, the average weekly volume for primary dealer trading of US public debt in October dropped from $576.6 billion to $531.87 billion. The 2013 high and lows for dealer holdings were $668.3 billion in June and $481 billion in August.
The US 10Y treasury closed on November 1 at 2.621 percent.
Price action has broken through support at 128’085, the 20 EMA and the narrow ascending trend line. The 50 EMA will be the next level of support, while topside potential will be a retest of previous support. Given the Fed-centric market conditions and rumors of a December taper – just in time for Bernanke’s departure – a 2.85 percent 10Y is likely by the end of 2013.
Previous 10Y futures chart showing relationship of price action support and resistance posted on October 26.