Treasuries Close Modestly Higher But Well Off Their Best Levels

(RTTNews) - After rising sharply in early trading on Monday, treasuries gave back ground as the day progressed but still closed modestly higher.

While bond prices pulled back well off their highs for the session, they still managed to close in positive territory. Subsequently, the yield on the benchmark ten-year note, which moves opposite of its price, ended the day down by 2.4 basis points at 2.874 percent after hitting a low of 2.777 percent.

The initial strength among treasuries came on the heels of news that former Treasury Secretary Larry Summers has withdrawn his name from consideration to replace Federal Reserve Chairman Ben Bernanke amid concerns about a potentially acrimonious confirmation process.

The news generated buying interest in the bond markets, as Summers was seen as likely to take a more hawkish approach to monetary policy.

Summers' decision was seen by some as paving the way for Fed Vice Chair Janet Yellen, who is perceived to be the most dovish candidate.

However, Paul Ashworth, Chief U.S. Economist at Capital Economics, said Yellen is probably the favorite but not the near-certainty that many will proclaim her to be.

"Nominating Yellen now could make Obama look weak, kowtowing to the Democrats who have been openly campaigning for her," Ashworth said.

"Instead, it's possible that there will now be a delay in the nomination process, while the administration seeks a new candidate," he added. "We know Obama has already interviewed Ex-Fed Vice Chair Donald Kohn and we wouldn't rule out the administration seeking to change Tim Geithner's mind."

Lingering uncertainty about the outlook for monetary policy contributed to the subsequent pullback by treasuries, with the Fed due to begin a two-day meeting on Tuesday.

Many economists expect the Fed to announce plans to begin scaling back its asset purchase program following the completion of the meeting on Wednesday.

On the economic front, the New York Federal Reserve released a report showing that regional manufacturing activity unexpectedly expanded at a slower pace in the month of September.

The New York Fed said its general business conditions index edged down to 6.3 in September from 8.2 in August. While a positive reading indicates continued growth in the New York manufacturing sector, economists had expected the index to climb to 9.0.

A separate report from the Federal Reserve showed that industrial production rose by slightly less than expected in the month of August.

The Fed said industrial production increased by 0.4 percent in August after coming in unchanged in July. Economists had expected production to rise by about 0.5 percent.

The slightly weaker than expected growth came as a drop in utilities output partly offset a rebound in manufacturing production.

While reports on consumer prices and homebuilder confidence may attract some attention on Tuesday, trading activity is likely to be somewhat subdued as the Fed meeting gets underway.