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REFILE-TREASURIES-Shorter-dated notes gain before jobs data
(Fixes typo in first paragraph)
* Focus on potential of payrolls data to impact QE plans
* Sept nonfarm payrolls seen unchanged from Aug
* Two-year note yield falls to a record low
* Weekly jobless claims unexpectedly dip (Adds comments, updates prices)
NEW YORK, Oct 7 (Reuters) - Prices of short-dated U.S. Treasuries gained slightly on Thursday on expectations that Friday's U.S. payrolls data will argue for further asset purchases by the Federal Reserve to support the economy.
Data on Thursday showing new U.S. claims for unemployment benefits unexpectedly fell last week to the lowest in nearly three months did not alter the view that the economy is struggling to produce jobs.
"People are speculating that tomorrow's number could be weak enough to validate the speculation about quantitative easing," said David Coard, head of fixed income sales and trading at Williams Capital Group in New York.
The two-year Treasury note US2YT=RR yield marked a record low on Thursday, dipping to 0.36 percent from Wednesday's finish near 0.39 percent.
The steady trudge lower in yields has shrunk the difference between two-year rates and the Fed's recommended funds rate -- now at zero to 0.25 percent -- to the narrowest spread since mid-December 2008, at the height of the financial crisis.
The reasons for the narrowing spreads differed, however, with a stampede for safe-haven U.S. government assets driving short rates lower during the financial crisis in 2008 and the Fed's pledge to keep rates low for an extended period and its supplemental easing strategies pushing rates lower this time.
Coard said he had not expected the two-year yield to dip much below 0.50 percent but that Treasuries at current levels seemed overbought. "If I were trading (two-year notes) I would probably be more of a seller here, just because we have come a long way very quickly," he said.
U.S. benchmark 10-year Treasury notes US10YT=RR traded unchanged in price on Thursday to yield 2.40 percent.
The median forecast from analysts polled by Reuters for September nonfarm payroll numbers due Friday morning is for an unchanged level of payrolls last month after employers shed 54,000 jobs in August.
"Tomorrow's results are arguably more important than they have been for many months ... because it is virtually certain that the Fed will kick off any plans to restart quantitative easing if tomorrow's report doesn't offer any reason for optimism," said Kevin Giddis, president of fixed income capital markets at Morgan Keegan in Memphis, Tennessee.
"They will go in November if payroll jobs are not a big 200,000 number," said Chris Rupkey, chief financial economist at Bank of Tokyo/Mitsubishi UFJ in New York.
Since bonds have already rallied so much in anticipation of easier monetary policy, one issue is how Treasuries would react when the Fed actually announces such purchases.
"Once it actually happens, maybe a lot of the quantitative easing will have been priced in by then," said Michael Collins, senior investment manager at Prudential Fixed Income, with $254 billion in assets under management, in Newark, New Jersey.
Still, Fed purchases could push rates even lower, he said.
"Every time you think Treasury yields can't get much lower, they go even lower," he said.
Separately, the Treasury on Thursday said next week it will auction a total of $66 billion of three-year notes, reopened 10-year notes and reopened 30-year bonds.
The prospect of more supply likely weighed on prices at the longer end of the Treasury curve, Coard said. "You've got to expect that some people are setting up for that," he said.
The 30-year bond US30YT=RR traded 20/32 lower in price, its yield rising to 3.71 percent from 3.67 percent late on Wednesday.
The U.S. Labor Department said initial claims for state unemployment benefits fell to a seasonally adjusted 445,000 from the prior week's upwardly revised 456,000. Analysts polled by Reuters had been looking for claims of 455,000 in the latest week. For details, see [ID:nLDE6961OQ] (Additional reporting by Chris Reese and Richard Leong; Editing by Chizu Nomiyama)
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