TREASURIES-Bonds leap in safety bid as stocks plummet

(Updates prices)

By Chris Reese

NEW YORK, Nov 1 (Reuters) - U.S. Treasuries prices leaped on Thursday as steep stock market losses and a resurgence in credit worries spurred demand for safe-haven investments a day after the Federal Reserve lowered interest rates.

Government data showing tame core inflation and weaker consumer spending, together with a private-sector report of slower manufacturing growth, also cut risk appetite and boosted expectations the Fed will lower rates at its December meeting. For details, see [ID:nN01406094]

"It is all concerns about the implosions in the credit markets and that we are only seeing the beginning of it -- that it is going to hurt the economy and most likely force the Fed's hand again to ease," said Mary Ann Hurley, vice president of fixed income trading at D.A. Davidson & Co. in Seattle.

"Also the economic data today was really mixed at best for the economy," she said.

U.S. benchmark 10-year Treasury notes US10YT=RR traded 30/32 higher in price for a yield of 4.36 percent from 4.47 percent late on Wednesday. Benchmark yields, which move inversely to prices, posted their biggest single-day dip in nearly eight weeks.

"The risk-aversion trade is to be long Treasuries," said Brian Edmonds, head of rates trading with Cantor Fitzgerald in New York.

At the shorter end of the curve, two-year notes US2YT=RR traded 11/32 higher in price for a yield of 3.78 percent, from 3.95 percent. The two-year note took back more than Wednesday's price gains, when traders trimmed bets for future interest rate cuts after the Fed's policy statement raised doubts about tighter monetary policy.

However, worries resurfaced in a big way on Thursday that further deterioration in the financial sector stemming from the housing slump and credit turmoil would hurt economic growth and pressure the Fed to lower rates in coming months.

Short-term interest rate futures on Thursday afternoon implied a 64 percent chance the Fed will lower rates by 25 basis points again in December, to 4.25 percent, against 42 percent on Wednesday afternoon.

The rate cut expectations were boosted after Credit Suisse (CSGN.VX) on Thursday reported a $1.9 billion write-down on bad loans and mortgage investments, and brokerage downgrades of Citigroup (C.N) raised concerns as to whether the biggest U.S. bank is under-capitalized.

Citigroup shares ended down nearly 7 percent and the decline in financial stocks weighed on the broader equities market. The Dow Jones industrial average .DJI tumbled 2.6 percent. For the full market report, see [.N]

Early in the session, data showing a slowdown in factory growth in October suggested the U.S. economy was cooling from its surprisingly robust third-quarter pace, even as data showed U.S. incomes edged higher in September while underlying consumer prices rose modestly.

Data also showed the number of U.S. workers filing new claims for jobless aid fell more than expected last week, but the four-week moving average of claims edged up to a six-month high.

Five-year notes US5YT=RR traded 21/32 higher for a yield of 4.03 percent from 4.18 percent, while the 30-year bond US30YT=RR traded 1-23/32 higher in price for a yield of 4.64 percent. (Additional reporting by Richard Leong)