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treasury-departmentNEW YORK: US Treasury debt prices rose on Thursday for a sixth straight session, as a stunning surge in weekly claims for jobless benefits intensified worries over a faltering economic recovery.

Most government debt prices revisited levels not seen since the safe-haven rally in the aftermath of the devastating earthquake and tsunami that ravaged Japan in mid-March.

The recent jump in jobless claims, due partly to special factors, is the latest evidence the world's largest economy has hit a soft patch. It cut bets on above-trend US growth in 2011 and chances the Federal Reserve would tighten policy between now and late 2012.

‘The markets are going through a key reversal here from economic optimism in the first quarter to reverting to the mean in the second quarter,’ said Robert Tipp, chief investment strategist at Prudential Fixed Income in Newark, New Jersey, which manages $240 billion in assets.

Market gains were limited by investor reticence to make big bets ahead of the government's jobs report on Friday and technical signals bonds are overbought, analysts said.

‘Treasuries rallied on the highly unexpected jump in claims but strong levels are keeping many hesitant ahead of the all-important non-farm payroll print,’ said Gennadiy Goldberg, fixed-income analyst at 4Cast Inc. in New York.

The US Labor Department said first-time filings for jobless benefits soared to 474,000 last week, the highest level since mid-August 2010. The surprise jump was attributed to factors ranging from spring break layoffs to the introduction of an emergency benefits program.

It also said worker productivity slowed to 1.6 percent in the first quarter but was faster than the 1.0 percent predicted by economists.

This week's weaker-than-expected jobs data have caused some economists to pare predictions for April payrolls growth.

The median forecast among analysts polled by Reuters is now a 186,000 increase from an earlier 198,000 rise.

Benchmark 10-year Treasury notes were 10/32 in price after rising as much as 15/32 after the bond-friendly employment data.

The 10-year yield was last 3.18 percent, down from 3.22 percent late on Wednesday. It touched 3.16 percent, just below the 3.17 percent key retracement level established during the uptrend from October 2010 to February.

The 30-year bond was up 16/32 with a yield of 4.30 percent, down from 4.32 percent late on Wednesday. The 30-year yield touched 4.27 percent earlier, the lowest level since early January.

The spread between two-year and 10-year yield shrank to 2.61 percentage points, the smallest since early December, signaling investor expectations of slowing US growth.

REDUCED OPTIMISM ON US GROWTH

Strong bids for Treasuries stemmed from reduced expectations the United States could produce enough jobs and demand to generate above-trend 4 percent growth this year.

The 10-year note yield, a gauge of investors' view on long-term US growth, has fallen some 40 basis points since mid-April.

‘The market is trying to determine where the deceleration in growth would be, which to me would be closer to 3 percent,’ Prudential's Tipp said.

This less sanguine outlook pushed nearby interest rates futures to contract highs on Thursday and longer inflation breakeven rates to their lowest levels since late March.

This week's fall in commodity prices has also tempered inflation anxiety. US crude prices tumbled 7 percent at $101.695 a barrel on Thursday.

The European Central Bank held key rates at 1.25 percent on Thursday after raising them in April for the first time since July 2008. Its president Jean-Claude Trichet signaled a rate increase is unlikely in June, which some analysts had expected, but left the door open for one in July.

Perception of a less aggressive ECB rate-raising campaign to cool inflation lifted Bunds and euro rate futures.

Treasuries trailed Bunds for the first time in six sessions as the yield discount on 10-year US government notes to 10-year Bunds shrank to 0.04 percentage point from 0.08 percentage point on Wednesday.

Copyright Reuters, 2010

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