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TREASURIES-Bond prices fall as data offers hope on economy

* Chicago PMI surges to 2-1/2-year high in October

* U.S. jobless claims fall in line with forecast

* Treasuries poised for second month of gains

By Richard Leong

NEW YORK, Oct 31 (Reuters) - U.S. Treasuries prices dipped

slightly on Thursday as a surprisingly strong report on Midwest

business activity soothed worries about sluggish fourth-quarter

growth after the recent federal government shutdown.

Despite Thursday's decline, the bond market was on track for

a second month of gains after a dismal summer.

The Institute for Supply Management-Chicago said its

regional business index jumped to 65.9 in October from 55.7 last

month. The reading handily beat the 55.0 forecast by analysts

and was the highest since March 2011.

"This was just ridiculously strong," said Eric Green, global

head of rates and currency research and strategy at TD

Securities in New York.

Still, Green and other analysts downplayed the importance of

the data as other indicators have signaled slower demand and

hiring in the aftermath of the first partial federal government

shutdown in 17 years. They stuck to the view that the Federal

Reserve will maintain its current $85 billion monthly bond

purchases into early 2014 to support the economy.

The federal government's report on Thursday of a decline in

new jobless claims in the latest week added to signs of

resilience in the economy. New claims fell by 10,000 to 340,000,

a hair above the average estimate of 339,000 new


"Things are not unraveling even though we might get another

disappointing jobs report," Green said.

The Labor Department will release its non-farm payrolls

report for October at the end of next week. Investors are keen

to gauge whether the 16-day government shutdown hurt the U.S.

employment picture.

In brisk volume, the bond market extended losses from

Wednesday, when investors saw a Fed post-meeting policy

statement as slightly more hawkish. Analysts said the Fed left

the door open to reducing stimulus in the coming months even

though policy-makers acknowledged slower growth due to the

government shutdown.

"They are trying to reinforce the view they are data

dependent. They really don't know," said James Sarni, managing

principal at Payden & Rygel in Los Angeles, which oversees $80

billion in assets.

The Fed on Thursday bought $927 million worth of Treasuries

due in November 2024 to May 2030, the latest purchase in its

bond-buying program.

Benchmark 10-year Treasury notes were 6/32 lower

in price with a yield of 2.547 percent, from 2.527 percent late

on Wednesday.

But 30-year bonds pared early losses to trade

flat, yielding 3.633 percent.

About $251 billion worth of Treasuries changed hands as of

noon Thursday, 40 percent above their 20-day average, according

to ICAP, the world's biggest inter-dealer broker in U.S.

government debt.

The 10-year yield has fallen around 50 basis points from a

two-year high of 3 percent. The yield touched a three-month low

last week at 2.471 percent.