* Jobless claims fall 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 buys $1.25 billion TIPS for Operation Twist
(Updates market action, adds new quote)
By Richard Leong
NEW YORK, Oct 11 (Reuters) - U.S. Treasuries prices fell on Thursday as traders sought to lower prices before a $13 billion auction of 30-year supply and a drop in jobless claims reduced safe-haven demand for bonds.
First-time filings for unemployment benefits unexpectedly fell to their lowest since February 2008, but the government said one-time factors likely caused the steep 30,000 drop in weekly 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. The Labor Department's September employment 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. Standard & Poor's downgraded Spain's rating to BBB-minus, a step above junk status, late Wednesday, citing the country's worsening economy and limited options to manage its fiscal woes.
Spain's borrowing costs turned lower after rising earlier on Thursday. The Spanish 10-year yield
was last 5.78 percent after touching 5.94 percent, not far from 6 percent, a level seen as unsustainable for euro zone's fourth biggest economy.
Some analysts, however, said the rating cut added pressure on Spanish 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 of 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 to 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 2.906 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 purchased $1.25 billion in Treasury Inflation Protected Securities 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.
The U.S. Treasury said on Thursday it will reopen a 30-year TIPS issue by $7 billion on Oct 11.
On the open market, regular 10-year Treasury notes
were 9/32 lower in price, yielding 1.709 percent, up 2.6 basis points from late on Wednesday.
fell 12/32 in price after flirting with a near 1 point drop earlier. The 30-year yield was last 2.904 percent, up 2 basis points from Wednesday and more than 3 basis points below its 200-day moving average, a key chart support for this maturity, according to Reuters data.
Treasuries might be safe vehicles to park cash until there is progress with the debt problems in Europe and U.S. lawmakers deal with expiration of major tax breaks and automatic spending cuts at year-end -- referred to as "the fiscal cliff," analysts and investors said.
"We are bouncing around in a range here. This is a good entry here," said Matt Duch, portfolio manager at Calvert Investment Management in Bethesda, Maryland, which oversees about $12 billion in assets.
(Editing by Kenneth Barry)
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((-------MARKET SNAPSHOT AT 11:34 a.m. EDT (1534 GMT)------- Dec T-Bond 148-11/32 (-12/32) Dec 10-Year note 133 (-07/32) Change vs Current Nyk yield Three-month bills 0.095 (-0.01) 0.097 Six-month bills 0.1475 (+0.00) 0.150 Two-year note 99-31/32 (-) 0.270 Five-year note 99-23/32 (-04/32) 0.681 10-year note 99-07/32 (-09/32) 1.712 30-year bond 96-29/32 (-13/32) 2.906 DOLLAR SWAP SPREADS LAST Change U.S. 2-year dollar swap spread 11.75 (-0.25) U.S. 3-year dollar swap spread 11.00 (unch) U.S. 5-year dollar swap spread 12.50 (-0.50) 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/