Prices slip on recipe of strong data and supply

NEW YORK (Reuters) - U.S. Treasuries finished lower on Thursday, slipping on a recipe of stronger economic data and upcoming supply blended with thin, preholiday trade.

Bond trading waned as trading desks exited for a long holiday weekend. The bond market closed early at 2 p.m. EST (1900 GMT) and will be closed on Friday for Christmas.

A drop in initial jobless claims and a separate decline in continuing claims offered evidence the labor market was on the mend. Some economists think U.S. payrolls may have even added jobs in December.

"We project a 25,000 increase in December payrolls to be released on January 8, 2010," said Ward McCarthy, chief fixed-income financial economist at Jefferies & Co New York.

Meanwhile, the underlying details of the government's report on November durable goods orders "pointed to solid demand from households and businesses," said Joseph LaVorgna, chief U.S. economist at Deutsche Bank Securities in New York.

The stronger data, viewed as evidence the economy is doing better, damped demand for safe-haven government securities.

SUPPLY IN A HOLIDAY WEEK

Bookended by the Christmas and New Year's holidays, billions of dollars of bills and short- and medium-term Treasury notes come to market in the coming week.

While thinly staffed dealers and investment houses might make distributing the securities a bit more challenging than unusual, some market observers sounded relatively sanguine about the auctions' prospects.

The Treasury will auction $118 billion of two-year, five-year and seven-year notes next week.

"We have significant supply next week, but the market has backed up quite a bit, so the auctions should go well," said William Sullivan, chief economist at JVB Financial Group in Boca Raton, Florida.

The auctions' December 31 settlement, coinciding with the year-end statement date, could also smooth the way for the new supply, Sullivan said.

"That will promote buyside interest," he said. "If you own the security, it will show up on your year-end balance sheet.

Finally, "the Street is going into the auctions quite short, Sullivan said, "so you should see some dealer short-covering."

The notion of an economic recovery starting to take hold put the market on track for the worst weekly performance in four weeks and the worst monthly performance since January.

Benchmark 10-year Treasury notes were down 12/32 in price in late trade on Thursday, their yields rising to 3.81 percent from 3.76 percent late Wednesday and up sharply from 3.54 percent at the close last Friday.

Two-year Treasury notes were trading 2/32 lower in price to yield 0.97 percent, up from 0.93 percent late Wednesday and 0.80 last Friday.

The 30-year bond was down a point, its yield rising to 4.68 percent from 4.61 percent on Wednesday and 4.46 percent last Friday.

The government said the number of workers filing new applications for jobless benefits fell last week to the lowest level in more than 15 months.

The government also said new orders for long-lasting U.S. manufactured goods, excluding transportation, surged 2.0 percent in November, handily beating market expectations for a 1.0 percent rise.

"Treasuries sold off slightly on the (data) release," said Ian Lyngen, senior government bond strategist at CRT Capital Group in Stamford, Connecticut.

A measure cleared the U.S. Congress Thursday to increase the U.S. debt limit by $290 billion, enough to keep financing the record deficit for another two months.

The Senate voted to raise the current $12.1 trillion limit and sent the bill to the White House for U.S. President Barack Obama to sign into law. The House of Representatives approved the increase on December 16.

(Additional reporting by Chris Reese; editing by Jeffrey Benkoe)