TREASURIES-Prices rise on ECB rate cut, U.S. GDP concerns

Luciana Lopez
Thursday, 7 Nov 2013 | 11:01 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 rose on Thursday on a surprise rate cut by the European Central Bank as well as underlying worries about U.S. economic growth.

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

The 2.8 percent annual expansion rate initially prompted a selloff in Treasuries as investors saw the growth potentially encouraging the Federal Reserve to slow its $85 billion per month bond buying in coming months. But a slowdown in consumer and business spending gave pause, analysts said.

"The initial selling burst on the GDP headline couldn't be sustained because the underlying numbers had just enough weakness to make people wait for the payroll numbers tomorrow," said Jim Vogel, interest rates strategist with FTN Financial in Memphis, Tennessee.

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.

"The Fed knows the calculation behind GDP and they will see the moderating trend, which is weaker than what the headline suggests," said Sam Bullard, a senior economist with Wells Fargo Securities in Charlotte, North Carolina.

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 rose 2/32 in price to yield 2.635 percent from 2.64 percent late on Wednesday.

The U.S. 30-year bond rose 08/32 in price to yield 3.757 percent from 3.77 percent late on Wednesday.

A separate report on Thursday from the Labor Department suggested the job 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.

The payroll figures were likely muddied by the federal government shutdown in the first half of October, when Congressional Republicans sought to undermine President Barack Obama's 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.