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TREASURIES-Prices gain in thin volume on global growth fears

Wednesday, 10 Oct 2012 | 4:06 PM ET

* IMF warns euro zone crisis threatens global growth

* U.S. sells $21 billion in 10-year notes

* Fed sells $7.8 billion in short-dated debt

(Updates to late afternoon)

By Richard Leong and Luciana Lopez

NEW YORK, Oct 10 (Reuters) - U.S. Treasuries prices rose on Wednesday after a sale of 10-year notes as investors worried about the health of the global economy and short bets found themselves squeezed.

While traders had sold off earlier in the day to prepare for the $21 billion sale of 10-year notes, part of this week's $66 billion in coupon-bearing offerings, Treasuries retraced that lost ground after the auction.

"There was some short covering, and that helped give the auction a pretty solid bid," said Kim Rupert, managing director of global fixed-income analysis at Action Economics LLC in San Francisco.

The higher prices in turn spurred more shorts to step in and cover their positions, she said. Volume remained thin, Rupert added.

The auction showed strong results, Nomura strategists said in a note, calling the non-dealer demand "a signal that there is broad-based demand for 10s at these levels."

Worries about the global economy, including the euro zone debt crisis, also supported safe-haven Treasuries, traders said.

In a report on Wednesday, the International Monetary Fund was sharply critical of European policymakers for their failure to restore confidence.

"The fear factor remains. The IMF underscored the bad news from Europe and its impact on the global economy," said Sharon Stark, chief fixed income strategist at Sterne Agee & Leach in Birmingham, Alabama.

The IMF, which will hold its semi-annual meeting in Tokyo this week, downgraded its outlook on global economic growth and said the euro area's economy is likely to contract this year. It also called the euro zone debt crisis the biggest risk to the world's financial health.

This dour view, together with warnings from Alcoa, Chevron and several other major U.S. firms on their future earnings, should support demand for the longer-dated Treasuries supply this week, Stark said.

The U.S. Treasury Department will complete this week's $66 billion worth of coupon debt offerings with a $13 billion sale of 30-year bonds on Thursday.

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Graphic: Euro debt crisis:

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The Federal Reserve also sold $7.8 billion in Treasuries due April 2014 to February 2015 under its Operation Twist. This program involves selling shorter-dated Treasuries and purchasing longer-dated issues in a bid to hold down long-term borrowing costs to bolster the economy.

In addition, the Federal Reserve in its September Beige Book report said its business contacts suggest economic activity is still expanding modestly in most regions though pockets of weakness and strained labor markets remain a problem for some districts.

The Beige Book offers anecdotal information on U.S. business activity collected by the Fed's 12 regional banks, and the findings will likely become "the basis of discussion" among Fed policymakers when they meet on Oct. 23-24, Sterne's Stark said.

Three top Fed officials - Minneapolis Fed chief Narayana Kocherlakota, Fed Governor Daniel Tarullo and Dallas Fed President Richard Fisher - speak at separate events on Wednesday.

Minneapolis Federal Reserve Bank President Narayana Kocherlakota, who proposed last month that the Fed hold interest rates near to zero until U.S. unemployment was back under 5.5 percent, also said his proposal required a collective forecast.

Fed Vice Chairwoman Janet Yellen said late Tuesday low short-term interest rates are essential to support the U.S. economy. She spoke at an event sponsored by the IMF and the Japanese Ministry of Finance.

On the open market, benchmark 10-year notes

were

9/32 higher in price, yielding 1.684 percent from 1.7130 percent on Tuesday.

Thirty-year bonds rose 23/32 in price to yield 2.889 percent, compared to 2.925 percent on Tuesday. (Editing by James Dalgleish)

((luciana.f.lopez@thomsonreuters.com)(+1 646 223 6319)(Reuters Messaging: luciana.f.lopez.thomsonreuters.com@reuters.net))

((-------MARKET SNAPSHOT AT 3:59 p.m. EDT (1959 GMT)------- March T-Bond (+) March 10-Year note (+) Change vs Current Nyk yield Three-month bills 0.1 (+0.00) 0.102 Six-month bills 0.145 (+0.00) 0.146 Two-year note 99-31/32 (-) 0.266 Five-year note 99-27/32 (+01/32) 0.659 10-year note 99-15/32 (+09/32) 1.684 30-year bond 97-08/32 (+23/32) 2.889 DOLLAR SWAP SPREADS LAST Change U.S. 2-year dollar swap spread 12.00 (-0.25) U.S. 3-year dollar swap spread 11.00 (-0.50) U.S. 5-year dollar swap spread 13.25 (unch) U.S. 10-year dollar swap spread 5.50 (unch)

U.S. 30-year dollar swap spread -22.00 (+0.25)))

Keywords: MARKETS USA BONDS/