* Jobless claims fell to lowest in over 4 years
* U.S. to sell $13 billion in 30-year bonds
* Rating cut on Spain cushions bonds' price drop
* Fed to buy up to $1.25 billion in TIPS
(Updates market action before debt sale, adds comment)
By Richard Leong
NEW YORK, Oct 11 (Reuters) - U.S. government debt prices fell on Thursday as traders sought to lower prices before a $13 billion auction of 30-year supply and encouraging data on jobless claims reduced safe-haven demand for bonds.
First-time filings for unemployment benefits unexpectedly fell to their lowest since Feb 2008, but the government said one-time factors likely caused the steep 30,000 weekly drop in claims.
"This suggests some improvement in the labor market," fueling selling in Treasuries, said David Keeble, global head of interest rate strategy at Credit Agricole Corporate & Investment Bank in New York.
The Federal Reserve embarked on a third round of large-scale bond purchases nearly a month ago in a bid to further reduce unemployment even as the September payroll report showed a surprise drop in the jobless rate to 7.8 percent, the lowest since January 2009.
However, persistent worries about the euro zone's debt troubles capped the decline in Treasury debt prices. These worries were aggravated after Standard & Poor's downgraded Spain's rating by two notches to BBB-minus late Wednesday, a step above junk status, basing the rating change on the country's worsening economy and limiting its options to managing its fiscal woes.
Spain's borrowing cost rose early Thursday with its 10-year yield
climbing to 5.90 percent, not far from the 6 percent threshold which is seen as unsustainable for euro zone's fourth biggest economy.
Some analysts, however, said the rating cut added pressure on Spain Prime Minister Mariano Rajoy to request a bailout, a step that would lessen Spain's drag on the region's financial malaise.
A bailout request could remove "Spain as an issue off the table for the bond market," said Jim Vogel, interest rate strategist at FTN Financial in Memphis, Tennessee.
The U.S. Treasury Department will complete this week's $66 billion worth of coupon debt offerings with its sale of 30-year bonds at 1 p.m. (1700 GMT).
Analysts were uncertain about the outcome at the 30-year bond sale after the strong demand at the three-year and 10-year auctions the previous two days. They attributed the strong bids on nervous investors piling into less risky government debt and players buying Treasuries to exit short positions.
In the "when-issued" market, traders expected the reopening of the 30-year issue originally sold in August to sell at a yield of 2.901 percent
. The 30-year auction in September fetched a yield of 2.896 percent.
Graphics: Euro debt crisis: U.S. jobless claims: U.S. trade deficits: U.S. import prices:
Meanwhile, the Federal Reserve was set to buy $750 million to $1.25 billion in Treasury Inflation Protected Securities at 11 a.m. (1500 GMT) 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.
On the open market, regular 10-year Treasury notes
were 12/32 lower in price, yielding 1.723 percent, up 4 basis points from late on Wednesday.
fell 22/32 in price to yield 2.921 percent, up 3.6 basis points from Wednesday. The 30-year yield was about 1.5 basis points below its 200-day moving average, a key chart support for this maturity, according to Reuters data.
(Editing by Theodore d'Afflisio)
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((-------MARKET SNAPSHOT AT 9:41 a.m. EDT (1341 GMT)------- Dec T-Bond 148-05/32 (-18/32) Dec 10-Year note 132-30/32 (-09/32) Change vs Current Nyk yield Three-month bills 0.0975 (+0.00) 0.099 Six-month bills 0.1475 (+0.00) 0.150 Two-year note 99-31/32 (-) 0.270 Five-year note 99-23/32 (-05/32) 0.684 10-year note 99-04/32 (-13/32) 1.724 30-year bond 96-19/32 (-24/32) 2.923 DOLLAR SWAP SPREADS LAST Change U.S. 2-year dollar swap spread 12.00 (unch) U.S. 3-year dollar swap spread 11.00 (unch) U.S. 5-year dollar swap spread 12.75 (-0.25) U.S. 10-year dollar swap spread 4.50 (-0.75)
U.S. 30-year dollar swap spread -23.00 (-0.75)))
Keywords: MARKETS USA BONDS/