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TREASURIES-Yields fall as U.S. manufacturing growth slows
October 1, 2014 / 6:38 PM / 3 years ago

TREASURIES-Yields fall as U.S. manufacturing growth slows

(Updates prices)
    * Weak Asia, Europe data adds bid for German, U.S. debt
    * U.S. factory activity slows unexpectedly
    * Short covering before U.S. jobs report adds to rally
    * Collateral shortage hurts repo market
    * Fed funds rate falls to 7 basis points

    By Karen Brettell
    NEW YORK, Oct 1 (Reuters) - U.S. Treasuries prices rose on
Wednesday after U.S. manufacturing growth unexpectedly slowed,
adding to earlier gains seen after worsening factory activity in
Europe and Asia increased concerns about faltering global
growth.
    Short covering by investors betting on yield increases was
seen adding to the Treasuries rally. Concerns after the first
diagnosis of a patient in the United States with the deadly
Ebola virus may have also added a safety bid. 
    U.S. manufacturing expanded in September but the pace of
growth at American factories slowed from August, which was the
best monthly showing since March 2011, according to an industry
report released on Wednesday. 
    "It doesn't confirm what everyone was hoping to be able to
trade as the fourth quarter got underway," said Jim Vogel, an
interest rate strategist at FTN Financial in Memphis, Tennessee.
    Many investors have been set up for higher interest rates
this quarter on expectations that the U.S. economy will continue
to improve even if global growth continues to decline, he said.
    Benchmark 10-year Treasuries were last up 20/32
in price to yield 2.42 percent, the lowest since Sept. 5 and
down from 2.51 percent Tuesday.
    A private employment report earlier on Wednesday showed that
U.S. private sector employment grew at a solid pace of 213,000
jobs in September. 
    Treasuries had earlier rallied in line with German bunds
after dwindling demand cut factory activity across much of Asia
and Europe in September, sending it to multi-month lows and
raising the chances that global growth would slow in the months
ahead. 
    Germany sold new 10-year bonds at record low yields of 0.93
percent on Wednesday. 
    A shortage of high-quality collateral even after the end of
the quarter continued to disrupt the repurchase agreement
market, where many bonds were trading at negative yields, or
"special."
    "We have record shorts in the front end of the market, there
is no collateral around, repo is very high so people are getting
squeezed on their financing," said Tom Tucci, head of Treasuries
trading at CIBC in New York.
    The federal funds rate fell for a second day to 7 basis
points. The Federal Reserve is expected to guide this rate to
the higher end of its 0-25 basis-point range as it gets closer
to raising rates.
    Record demand for Treasuries at the New York Federal
Reserve's reverse repurchase agreement operation on Tuesday,
which is meant to help the U.S. central bank set a floor on
short-term rates, resulted in the Fed paying no interest on the
overnight loans for the first time.
    Banks and investors bid more than the Fed's $300 billion
daily limit for the first time, with $407 billion offered in
total. Banks and the funds have previously been paid 5 basis
points, or 0.05 percent, for the loan. 

 (Editing by Chizu Nomiyama, Bernadette Baum and James
Dalgleish)

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