TREASURIES-U.S. yields slightly higher after soft auction; risk tone still positive

       * U.S. Q2 advance GDP lower than expected
    * U.S. initial jobless claims were higher than forecast
    * U.S. 10-year TIPS yield hits new record low
    * U.S. 7-year note auction was worst in four months -analyst

 (Recasts, adds analyst comment, updates prices)
    By Gertrude Chavez-Dreyfuss
    NEW YORK, July 29 (Reuters) - U.S. Treasury yields inched
higher on Thursday, but were below their peaks for the day,
after a soft 7-year note auction added to the positive risk tone
which persisted all day despite weaker-than-expected U.S. data.
    Overall, U.S. yields have been on a downward trajectory over
the last couple of months. Since mid-May, U.S. 10-year yields
have fallen about 40 basis points.
    A Federal Reserve statement on Wednesday that suggested the
U.S. central bank is inching closer to reducing its asset
purchases had limited impact on the market, as yields stalled. A
Fed tapering would typically reduce the appeal of Treasuries,
pushing yields higher.
    "The Fed thinks they can taper and the economy can keep
growing," said Zhiwei Ren, portfolio manager at Penn Mutual
Asset Management in Philadelphia.
    "They think they can hike rates and the economy can keep
growing and they can hike more. I don't think the bond market is
buying it," he added.
    Treasury yields initially fell on Thursday after the release
of softer-than-forecast U.S. economic data, but came slightly
back up.
    The advance estimate for U.S. gross domestic product in the
second quarter showed the economy grew at a 6.5% annualized
rate, lower than market forecasts for an 8.5% rise.
    In a separate report, U.S. initial jobless claims were at
400,000 for the latest week, higher than consensus expectations
of 380,000.
    U.S. stocks looked past the U.S. data, with the Dow
and S&P 500 hitting fresh intraday record highs earlier
due in part to a slate of strong corporate earnings reports.

    Upbeat Chinese news on regulation that pushed their shares
higher added to the sanguine mood on Wall Street, as did strong
European economic reports on euro zone investor sentiment and
German inflation.
    Thursday's U.S. 7-year auction was lackluster, with a yield
of 1.05%, higher than the expected rate at the bid deadline of
1.042%, suggesting that investors wanted a little more yield to
take the note.
    The bid-to-cover ratio, a gauge of demand, was 2.23, below
both the 2.36 last month and what analysts said was the 2.33
average.
    "Bid to cover at 2.23x reflected a preference for either 5s
or 7s in this environment," Jim Vogel, senior rates strategist
at FHN Financial, said in a research note after the auction.
    "Dealers are not stepping up this week, with a share of only
22.2%. It's the worst 7-year auction in four months."
    In late afternoon trading, the U.S. 10-year Treasury yield
was up a little at 1.267%.
    U.S. 30-year yields were little changed at 1.913%
 from Wednesday's 1.911%.
    Post-auction, U.S. 7-year note yields were slightly higher
at 1.024%
    In other parts of the Treasury market, the yield on 10-year
Treasury Inflation-Protected Securities (TIPS) plunged to a
fresh record low of -1.175%, as investors priced
in higher inflation going forward.
    Penn Mutual's Ren said the record low yields on 10-year
TIPS, also known as real yields, is a "pessimistic signal" on
the economy.

      July 29 Thursday 3:45PM New York / 1945 GMT
                               Price        Current   Net
                                            Yield %   Change
                                                      (bps)
 Three-month bills             0.045        0.0456    -0.005
 Six-month bills               0.0525       0.0532    0.002
 Two-year note                 99-217/256   0.2015    -0.009
 Three-year note               100-4/256    0.3697    -0.016
 Five-year note                99-124/256   0.7303    -0.010
 Seven-year note               101-128/256  1.0248    0.005
 10-year note                  103-76/256   1.2659    0.003
 20-year bond                  106-236/256  1.8314    0.000
 30-year bond                  110-128/256  1.9111    0.000

   DOLLAR SWAP SPREADS
                               Last (bps)   Net
                                            Change
                                            (bps)
 U.S. 2-year dollar swap         7.50         0.00
 spread
 U.S. 3-year dollar swap        11.75         0.25
 spread
 U.S. 5-year dollar swap         8.75         0.75
 spread
 U.S. 10-year dollar swap        2.75         0.75
 spread
 U.S. 30-year dollar swap      -23.75         1.75
 spread


 (Reporting by Gertrude Chavez-Dreyfuss; Editing by David
Gregorio and Sonya Hepinstall)

Copyright © Reuters 2008. All rights reserved. Republication or redistribution of Reuters content, including by caching, framing or similar means, is expressly prohibited without the prior written consent of Reuters. Reuters and the Reuters sphere logo are registered trademarks and trademarks of the Reuters group of companies around the world.

News, commentary and research reports are from third-party sources unaffiliated with Fidelity. Fidelity does not endorse or adopt their content. Fidelity makes no guarantees that information supplied is accurate, complete, or timely, and does not provide any warranties regarding results obtained from their use.