TREASURIES-Prices near flat on ECB rate cut, mixed U.S. GDP

Luciana Lopez
Thursday, 7 Nov 2013 | 9:21 AM ET

* U.S. economy grew faster than expected in third quarter

* ECB surprises markets by cutting rates

* October nonfarm payrolls, due on Friday, key for Fed outlook

NEW YORK, Nov 7 (Reuters) - Prices for U.S. Treasuries traded nearly flat on Thursday as investors weighed mixed U.S. GDP data against a surprise rate cut from the European Central Bank.

The U.S. economy grew faster than expected in the third quarter as businesses restocked shelves.

A stronger U.S. economy could persuade the Federal Reserve to slow its $85 billion per month bond buying in coming months.

The timing of the Fed's so-called taper has become a central question for Treasuries this year, with some analysts now saying the Fed might wait until 2014 before it begins cutting back.

But despite a higher-than-expected headline GDP number, a slowdown in consumer and business spending pointed to underlying weakness in the world's biggest economy, which relies heavily on consumers to open their wallets month after month.

The soft consumer spending - a 1.5 percent expansion rate, the slowest since the second quarter of 2011 - could instead keep the Fed on hold.

"We saw a softer growth when you strip out the build-up in inventories," said Sam Bullard, a senior economist with Wells Fargo Securities in Charlotte, North Carolina.

"The Fed knows the calculation behind GDP and they will see the moderating trend, which is weaker than what the headline suggests," he said.

The role of inventories in the current GDP figures could also be a warning bell for the fourth quarter "as the buildup slows and weaker consumption fails to keep up," said Gennadiy Goldberg, a U.S. strategist with TD Securities in New York.

Prices rose earlier in the session after the European Central Bank cut its main interest rate on Thursday to a record low of 0.25 percent, responding to a surprise drop in inflation by easing policy to support the euro zone's weak recovery.

Prices for U.S. benchmark 10-year Treasury notes dipped 1/32 in price to yield 2.642 percent from 2.64 percent late on Wednesday.

The U.S. 30-year bond traded flat to yield 3.771 percent.

A separate report on Thursday from the Labor Department suggested the jobs market continued to gradually improve.

Initial claims for state unemployment benefits fell 9,000 to a seasonally adjusted 336,000 last week. Economists polled by Reuters had expected first-time applications to fall to 335,000.

Investors will get more information on the labor market on Friday, with the release of October nonfarm payrolls figures. Those data are key for the U.S. Federal Reserve.

"Expectations are for a very weak payrolls number for tomorrow. If the number is higher, the market will begin to reassess when the Fed begins to taper," said Quincy Krosby, a market strategist at Prudential Financial in Newark, New Jersey.

Fed policymakers want to see the unemployment rate dropping closer to 6.5 percent from the current 7.2 percent, but economists in a Reuters survey expect that rate to have edged up in October to 7.3 percent.

However, the payroll figures were likely muddied by a federal government shutdown in the first half of October, when Congressional Republicans sought to undermine President Barack Obama's signature healthcare law as a condition of funding the government.

Economists have said the shutdown might have dragged on growth in the fourth quarter, but data so far, including manufacturing figures, suggest the economy might have shown resilience in the face of that headwind.