* April U.S. factory data strongest in 10 months * U.S. construction weaker-than-expected in March * Trading volume light due to May Day holiday * Treasuries recovered in April after weak Q1 By Richard Leong NEW YORK, May 1 U.S. government debt prices fell on Tuesday as the U.S. manufacturing sector unexpectedly grew at its strongest pace in 10 months, reducing fears U.S. economy is faltering and required more stimulus from the Federal Reserve. Benchmark yields, however, are still hovering at their lowest levels in nearly three months on the perception that a recession is spreading across Europe and the high U.S. unemployment remains a drag on economic growth. The Institute for Supply Management said its index on U.S. nationwide factory activity rose to 54.8 in April, up from 53.4 in March. Economists had predicted ISM's factory activity index, which the Fed monitors, likely slipped to 53.0 last month. "This is a real positive for the economy because it's so strong," James Newman, head of Treasuries and agency trading at Keefe, Bruyette and Woods in New York, said of the latest U.S. ISM factory report. "But it does come down to the jobs number on Friday." The U.S. Labor Department will release its April jobs survey at 8:30 a.m. (1230 GMT) on Friday. Economists expect companies likely added 170,000 jobs in April after a disappointing 120,000 gain in March. A surprising weak government report on March payrolls, which was followed by a slew of disappointing economic data, shook investor confidence about the U.S. economy. It had shown signs of gaining traction in January and February and spurred speculation the Fed might consider stepping away from its ultra loose monetary policy. "People are concerned if you get another weak jobs report, it would be a trend," Newman said. The latest ISM data have stemmed fears of a rapid U.S. economic deterioration. They followed mixed overseas readings, which showed British factory output barely grew in April but Chinese manufacturing growth accelerated at its fastest pace in 13 months. The unexpectedly acceleration in domestic factory activities was mitigated by government data that showed a slim 0.1 percent rise in construction spending in March. Trading volume was scant as financial markets in China and many euro zone and Latin American countries were closed for May Day or Labor Day. As of 10 a.m. (1400 GMT), Treasuries volume was about half its 20-day average, according to bond broker ICAP. There was a modest pickup in activity in advance of the latest Treasuries purchase by the Fed for its "Operation Twist" program. The U.S. central bank is set to buy $4.50 billion to $5.25 billion in Treasuries due in May 2020 to Feb 2022 at 11 a.m. (1500 GMT). The Fed's $400 billion bond program, aimed at holding down mortgage rates and other long-term borrowing costs, is scheduled to end in June. In the open market, benchmark 10-year notes traded down 7/32 in price to yield 1.95 percent, up 3 basis points from Monday's close. Thirty-year bonds fell 17/32 in price for a 3.14 percent yield, up 3 basis points from late on Monday. U.S. government debt prices started May on a down note after a strong April. Barclays' total return index on Treasuries rose 1.45 percent in April, according to data that became available late on Monday, lifting to the sector into positive territory for the year after logging its worst quarter since 2010 from January to March. Year-to-date, the index was up 0.14 percent. The comeback in U.S. government debt was led by long-dated issues, which regained their appeal due to anxiety about Europe's fiscal problems and slowing growth in the United States. Treasuries maturing in 20 years or later earned a total of 4.66 percent last month, reducing their year-to-date decline to 2.38 percent, according to Barclays.
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