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Treasuries Rattled by Jobs Revival Fear

By Wayne Cole

NEW YORK (Reuters) April 1- Treasuries prices slid on Thursday as signs of unexpected strength in U.S. manufacturing stoked speculation that jobs might not be far behind.

Jobs have become the lodestone for the bond market since many investors believe the Federal Reserve (news - web sites) will not start to hike interest rates unless and until employment shows a sustained revival.

"We've had some disappointing numbers over the past few months, but today's ISM report suggests that payroll growth is poised to get better, maybe even in tomorrow's report," said Gary Thayer, chief economist at A.G. Edwards & Sons in St. Louis.

Should Friday's payrolls report actually prove strong, the bond market will have to price in a greater risk of a tightening this year, and that could see yields zoom higher.

In early trading, the benchmark 10-year Treasury note shed 18/32 in price. That lifted yields to 3.91 percent from 3.84 percent on Wednesday and threatened month-highs around 3.92 percent. Yields on two-year notes jumped to 1.65 percent from 1.57 percent

The Institute for Supply Management said its index of manufacturing activity rose to 62.5 in March from 61.4 in February. Analysts had looked for a dip to 60.0.

The ISM's employment component rose to 57.0 in March from 56.3 in February, although analysts caution that the correlation between the survey and payrolls is scant, to say the least.

Median forecasts in a Reuters poll taken last week were for payrolls to rise only a modest 103,000 in March, but the whisper number in the market has risen steadily in recent days to top 200,000.

Five-year notes lost 12/32, taking yields to 2.86 percent from 2.78 percent. Later on Thursday, the Treasury will announce the size both of a new five-year auction due next week and a sale of 10-year inflation protected notes, or TIPs.

The 30-year bond fell 29/32, raising its yield to 4.83 percent from 4.78 percent.

The market also suffered in sympathy with euro zone debt, which fell sharply after the European Central Bank passed on a chance to cut interest rates. ECB President Claude Trichet also took a hawkish line in a news conference afterward, forcing investors to scale back chance of an easing in the future.

The outlook for steady U.S. rates was not challenged by early U.S. data. Initial jobless claims dipped to 342,000 after the previous week's total was revised up to 345,000, suggesting that while firings may have stabilized, overall labor conditions were improving at a painfully slow pace.

Producer prices rose 0.1 percent in February -- the market had expected a rise of 0.4 percent. The core rate excluding food and energy also rose just 0.1 percent.

There were signs of growing price pressures at the core and intermediate stages of production but little evidence as yet that this was being passed on to consumers.

Still to come on Thursday were figures on auto sales for March and two Fed speakers. Sales of North-American made vehicles, which is what counts for GDP (news - web sites), are seen rising to an annual 13.4 million pace from 13.0 million in February.

Chicago Fed President Michael Moskow speaks on "The Fed and the Economy" at noon (1700 GMT). He spoke just last week when he reiterated the Fed's pledge to be patient on policy and played down fears that inflation was set to reignite.

Fed Board Governor Donald Kohn speaks on "Monetary Policy and Economic Imbalances" around 12:30 p.m. (1730 GMT). Kohn is considered to be close to Chairman Alan Greenspan (news - web sites) and the market lends a lot of weight to his comments.

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