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Bond Prices Up as Stocks Look for Direction

Treasury debt prices rose after the Philadelphia Federal Reserve's business conditions indexfor April fell to its lowest level since February 2001, adding to other recent signals the US economy is deteriorating.

The benchmark 10-year Treasury note's price, which moves inversely to its yield, rose 8/32 for a yield of 3.68 percent, versus 3.71 percent late Wednesday.

Longer-maturity Treasury debt prices rose earlier as a lower open for US stocks stoked demand for safe-haven government debt.

Short-maturity yields, which move inversely to their prices, rose as market participants pared back expectations for Federal Reserve interest rate cuts. The two-year note yield, which responds closely to expectations for Fed rate moves, rose above 2 percent for the first time since late February.

A report on the US labor market indicated job conditions are deteriorating, although the rise in initial jobless claims for the latest week rose was below the economists median forecast.

"Treasurys seem to be pretty much reacting to equity markets more than the jobless claims numbers," said Matthew Moore, economic strategist with Banc of America Securities in New York.

The 2-year Treasury note's price was down 2/32 for a yield of 2.02 percent, versus 1.99 percent late Wednesday.

Many now expect the central bank may trim rates by a shallow quarter percentage point at the end of this month and then pause its seven-month rate easing cycle for fear of exacerbating already accelerating inflation pressures.

"The Fed seems to be caught in a balancing act between the problems in credit and the economy and the fear of inflation," said Joe Keetle, senior wealth manager at Dawson Wealth Management in Cleveland, Ohio.

Short-term interest rate futures were showing the chance of a 25 basis-points rate cut at the policy meeting at the end of this month is fully priced in, with just a 22 percent chance of a deeper 50 basis points cut.

"We have another rate cut coming up and I think they will go with a quarter percentage point. They are starting to run out of room," Keetle said.

Some analysts also said escalating strains in short-term lending markets might be driving investors to the safety of Treasurys.

The interbank cost of borrowing dollars posted its biggest gain in eight months on Thursday, according to the British Bankers Association, which has accelerated a review of how Libor, a key reference interest rate, is set.

Three-month dollar Libor rose to 2.81750 percent from 2.73375 percent -- its biggest rise since August 2007, after the BBA said late on Wednesday it would exclude from the process any banks that distort the market.

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