(Fixes typo in price of 10-year note in sixth graph)
By Karen Brettell
NEW YORK, Oct 5 (Reuters) - U.S. Treasuries prices fell onFriday as an unexpected drop in the U.S. jobless rate helpedboost expectations for an improving economy and as dealersprepared for new long-dated debt sales next week.
The U.S. Labor Department said the unemployment rate fell toa four-year low of 7.8 percent in September, down from 8.1percent in August, as 114,000 jobs were added.
"The big shock was the drop in the rate, the consensusnumber was right in line," said Sean Murphy, a Treasuries traderat Societe Generale in New York.
Treasuries sold off as investors saw the data as signalingan improving economy, if still tepid growth.
"Given that the data has been a little bit better thanexpectations over the course of the week we are probably sittinga little bit rich," said Murphy.
Benchmark 10-year notesfell 20/32 in price toyield 1.74 percent, the highest level since Sept. 24.Thirty-year bonds
dropped 1-20/32 in price toyield 2.97 percent, just above the debt's 200-day moving averageand the highest level since Sept. 21.
The long bonds' yields are now seen approaching the 3percent level, where they traded before the Fed announced itsthird round of easing on Sept. 13, as dealers prepare for a newsupply next week.
"There is no incentive for a dealer to step up and takepaper in front of next week's supply," said Chris Ahrens, aninterest rate strategist at UBS in Stamford, Connecticut.
The sales will also occur in a U.S. holiday-shortened week,with bond markets closed on Monday for the Columbus Day.
Treasuries also weakened after a report that the EuropeanCentral Bank envisions buying large volumes of sovereign bondshelped Spanish debt spreads rally and reduced demand for safehaven bonds.
"In Europe, the peripheral spreads came crashing in today.All these factors weigh on Treasuries at these low levels ofrates," said Ahrens.
The ECB may buy large volumes of sovereign bonds for aperiod of one to two months once its program of "OutrightMonetary Transactions" is launched, but would then suspendpurchases during an assessment period, senior central banksources told Reuters.
The Federal Reserve sold $7.802 billion in U.S. Treasurycoupons on Friday maturing from February 2013 to February 2014as part of its "Operation Twist" stimulus program that extendsthe average maturity of the central bank's Treasury holdings inorder to lower mortgage rates and other long-term borrowingcosts.
Some analysts expect the Fed may extend quantitative easingto Treasuries, from mortgage-backed debt, when Operation Twistexpires at the end of the year.
(Editing by Bob Burgdorfer)
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((-------MARKET SNAPSHOT AT 2:48 p.m. EDT (1848 GMT)-------
Change vs CurrentNyk yieldThree-month bills0.1025 (+0.00) 0.104Six-month bills0.14 (+0.00) 0.142Two-year note99-31/32 (-01/32) 0.262Five-year note99-25/32 (-06/32) 0.67110-year note98-31/32 (-19/32) 1.73930-year bond95-20/32 (-1-20/32) 2.972DOLLAR SWAP SPREADSLAST ChangeU.S. 2-year dollar swap spread 13.75 (+0.50)U.S. 3-year dollar swap spread 13.25 (+0.50)U.S. 5-year dollar swap spread 14.25 (+0.25)U.S. 10-year dollar swap spread 6.50 (-0.75)
U.S. 30-year dollar swap spread -21.00 (-0.25)))
Keywords: MARKETS USA BONDS/