NEW YORK: US Treasuries erased early gains and turned lower on Thursday as traders cut prices before the Treasury's 30-year bond sale.

Earlier, prices rose after the Labor Department reported an unexpected jump in the number of filers for initial jobless benefits last week. But those gains were lost as the market headed into the $13 billion 30-year auction, set for 1 p.m. (1700 GMT).

Ten-year notes, up 10/32 earlier, reversed that gain and fell 4/32, their yields rising to 3.48 percent. In when-issued trading, 30-year bonds yielded 4.55 percent.

"Steam (came) out of the rally. especially ahead of the 30-year bond auction," said Bank of Tokyo/Mitsubishi UFJ chief financial economist Chris Rupkey.

"The focus is on the 30-year auction and the interest from foreign investors," said Kevin Giddis, president of fixed income capital markets at Morgan Keegan.

"With the rally over the week, the 30-year is now back almost smack in the middle of the tight range to which it has grown accustomed," said Cantor Fitzgerald fixed-income rates strategist Justin Lederer, noting yield lows nearing 4.40 percent and yield highs approaching 4.70 percent.

Lederer said many market participants could buy 30-year bonds to enter flattening trades.

"The long end of the Treasury market has lagged on the curve every day since the Fed concentrated their (bond) purchases in this sector on April 6," he said.

But 30-year auctions can also be volatile, Lederer said, and John Spinello, chief fixed-income technical strategist at Jefferies, cited a risk in "chasing the auction into strength" with an uncertain customer bid and a risk-averse dealer base.

The Federal Reserve bought $7.680 billion in Treasuries with maturities ranging from April 15, 2018, to February 15, 2021. The purchases are part of the US central bank's ongoing steps to spur an economic recovery.

Treasuries derived early strength from government data on producer prices as well as new jobless claims.

The number of new filers unexpectedly lept to 412,000 last week from an upwardly revised 385,000 the week before.

The government also reported a somewhat higher-than-expected 0.3 percent rise in core producer prices for March.  "The duo of reports was rather (bond market) friendly if you dig deep enough," said David Ader, senior government bond strategist at CRT Capital Group in Stamford, Connecticut.

"Claims rose; producer prices were higher on the surface, but excluding energy, they rose just 0.1 percent," he said.

With gasoline prices again the biggest factor behind last month's PPI increase, core producer price inflation is "still pretty contained, so there is little reason to believe that this report will alter the Fed's stance that it can ignore the commodity price spike," said Paul Ashworth, chief US economist at Capital Economics in Toronto.

Recent signs of weakening economic activity are, however, supportive for bonds, said Brian Levitt, economist at Oppenheimer Funds in New York, the latter with $185 billion in assets under management.

"The Treasury market is beginning to pick up on some signs of weakness in the US economy," Levitt said. "This is not the stuff of a double-dip recession, but coming into the year the party was starting to get going in the United States and we've been hit with higher commodity costs, and that's having some impact on consumer and business activity."

Copyright Reuters, 2011

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