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TREASURIES-U.S. bond prices slip 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 fell on

Thursday as a stunningly strong report on Midwest business

activity eased some pessimism that fourth-quarter growth may be

sub-par following the recent federal government shutdown.

Despite Thursday's decline, the bond market was poised 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 many 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 keep 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,

close to an estimated 339,000 claims.

"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. While the monthly

jobs data is always closely watched, the report for October is

of particular interest as investors are looking for signs of the

impact of the government shutdown during the first half of the


In brisk volume, the bond market added to losses on

Wednesday tied to a perceived less-dovish view from the Fed

following its recent two-day meeting. Analysts concluded 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 bought $927 million worth of Treasuries due in

November 2024 to May 2030, the latest purchase in its

bond-buying program.

Treasuries prices rose earlier along with German Bunds as

disappointing euro zone data raised hopes that the European

Central Bank might lower interest rates next week in an effort

to support that region's struggling economy.

"A lot of people think next week the ECB might cut rates or

provide more liquidity," said David Keeble, global head of

interest rates strategy at Credit Agricole Corporate &

Investment Bank in New York.

The European Union's statistics office reported that euro

zone inflation sagged to a near four-year low in October with

unemployment lingering at record highs in September. "This plays

into more action from the ECB," Keeble said.

Benchmark 10-year Treasury notes were 9/32 lower

in price with a yield of 2.560 percent, up 3 basis points from

late on Wednesday. They lagged their German counterparts

, with the 10-year yield premium rising to 85 basis

points, the highest since mid-September, according to Reuters


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 interdealer broker in U.S.

government debt.

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

high of 3 percent. The yield touched a three-month low last week

at 2.471 percent.

Month-to-date, Treasuries have earned a total return of 0.49

percent following a 0.7 percent gain in September. But they were

still down 1.53 percent so far this year, according to an index

compiled by Barclays.

Treasuries have trailed other types of U.S. bonds this year.

High-yield or junk bonds, for example, have earned a 2.48

percent return so far in October, raising its year-to-date gain

to 6.30 percent, according to Barclays data.