TREASURIES-U.S. 30-year yields sink to near 11-month lows

Thu May 1, 2014 4:49pm EDT

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(Updates prices, adds ETF action)

* U.S. ISM manufacturing rises but offset by construction data

* Traders cite selling of T-bond puts

* Focus on Friday's U.S. nonfarm payrolls report

By Gertrude Chavez-Dreyfuss

NEW YORK, May 1 (Reuters) - U.S. Treasury debt prices advanced on Thursday, pushing yields on long-dated bonds to multi-month lows, in a market that continued to cover short positions ahead of Friday's all-important U.S. nonfarm payrolls data.

Yields on 30-year bonds plunged to near 11-month lows, while those on 10-year notes slid to two-month troughs.

Thursday's U.S. economic reports were in general positive, which should suggest that Treasuries should sell off, not rally.

On Thursday, the Institute for Supply Management said its index of national factory activity rose to 54.9 in April from 53.7 in March. It was the strongest reading since December. However, that was offset by a lower-than-expected rise in U.S. construction spending of 0.2 percent, compared with expectations for a 0.5 percent increase.

"The fact that we have seen stocks pull back and Treasuries rally despite a strong ISM number would suggest that the market is positioned relatively short for the payrolls number tomorrow," said Ian Lyngen, senior government bond strategist, at CRT Capital in Stamford, Connecticut.

Some analysts were perplexed as to why the bond market reacted more to the construction number, which was backward-looking, instead of the ISM report, viewed as first-tier data.

Lyngen surmised the tepid rebound in U.S. construction spending could further revise lower the already dismal U.S. gross domestic product growth figures for the first quarter.

Ahead of the Labor Department's nonfarm payrolls report on Friday, the market's positioning remained on the short side, analysts said, with volumes light due to the May Day holiday in Europe and much of Asia.

A Reuters poll showed economists expect the U.S. economy to have created 210,000 jobs in April.

In late afternoon trading, the benchmark 10-year U.S. Treasury note rose 9/32 in price to yield 2.61 percent, compared to 2.65 percent late on Wednesday. Yields fell as low as 2.59 percent, the lowest since March 3.

Prices of 30-year Treasury bonds were up 30/32 to yield 3.40 percent, from 3.46 percent the previous session. Yields dropped to 3.39 percent, the lowest since mid-June 2013.

Traders also cited selling in U.S. Treasury options on Thursday, as some market participants further reduced their bets of a solid April payrolls figure given Wednesday's poor 0.1 percent reading for first-quarter U.S. GDP growth.

On the Chicago Board of Trade, there was active selling in June T-bond puts at strike prices of 132 and 134 . June T-bond futures rose to 135-15/32 after touching their highest levels in two months earlier.

"There's a bit of a short squeeze here," said John Brady, managing director of interest rate futures sales at R.J. O'Brien and Associates in Chicago. "The economy is not that strong after the GDP, housing and construction numbers we've seen."

Short-covering of Treasuries were also evident in the exchange traded fund world. Investors bought heavily the iShares Barclays 7-10 year Treasury Bond ETF on Thursday, which ended the trading day at $102.41, the highest in two weeks. Volume shot up to a record 21.8 million shares.

Heavy buying was also seen in the ProShares Ultra 7-10 year Treasury ETF, closing at $52.67, the highest in 1-1/2 months. Volume rose to 12.38 million shares, the most in two months. (Additional reporting by Richard Leong; editing by Andrew Hay)

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