(Adds Treasury, Fed news and late market prices) By Karen Brettell NEW YORK, Nov 19 (Reuters) - U.S. Treasury yields fell on Thursday as the prospect of a weak fourth economic quarter overcame optimism that vaccines against COVID-19 are close to being rolled out and could return the economy to normal. "The focus has shifted away from exuberance on vaccines to the rising infection rate and the start of the deterioration of the fundamentals we"re seeing in the data heading into Q4," said Subadra Rajappa, head of U.S. interest rates strategy at Societe Generale in New York. After Wall Street closed, Treasuries got a risk-off boost, with yields falling further and U.S. stock futures dropping on surprise news that Treasury Secretary Steven Mnuchin told the Federal Reserve to return money earmarked for pandemic lending to businesses, nonprofits and local governments. The government will end on Dec. 31 some crisis programs that the central bank views as vital to keeping the economy stable. The number of Americans filing new claims for jobless benefits unexpectedly rose last week as new business closures to control spiraling COVID-19 infections unleashed a fresh wave of layoffs and further slowed the labor market recovery. Benchmark 10-year yields fell 3 basis points to 0.855% during regular trade, then slipped to 0.82% in the wake of Mnuchin"s announcement. The yields are down from an eight-month high of 0.975% last week, when supply and optimism over vaccines pushed the rates higher. The yields came off session lows of 0.842% in afternoon trading after CNBC reported that Democratic and Republican senators had agreed to resume stimulus talks. The yield curve between two-year and 10-year notes flattened 1 basis point to 68 basis points, extending to 66 basis points later. Thirty-year bonds outperformed, with the spread between the bonds and 10-year notes tightening as far as 71 basis points, the smallest gap since Sept. 3. Yields on one-year Treasury bills fell to 0.101%, the lowest since April. Last week"s spike in yields has increased speculation that the Federal Reserve may increase its purchases of long-dated debt by shifting more of its bond purchases further out the curve, or by increasing the overall amount of its quantitative easing, in order to keep monetary conditions loose. But many analysts and investors see such a move as likely only if 10-year yields rise above the 1% level and remain elevated. They have now retraced almost all of last week"s spike and what the late news from the Treasury Department means for its overall market support operations is an open question. At current levels, "I don"t know that they would start to step in just yet," said Paula Solanes, senior portfolio manager at SVB Asset Management. At the Fed"s December meeting the U.S. central bank may "telegraph the message of what they plan to do," she said. Dallas Federal Reserve Bank President Robert Kaplan on Thursday said that "if we needed to, if this got bad enough, we could extend maturities, but I wouldn"t increase the size." The Treasury Department saw strong demand for a $12 billion sale of 10-year Treasury Inflation-Protected Securities (TIPS) on Thursday. The notes sold 1 basis point below where they traded before the auction with high yield of -0.867%. Dealers took less than average at 15.2% of the sale, indicating strong demand by investors. Break-even rates on the 10-year TIPS are pricing in average annual inflation of 1.681% over the coming decade, with fiscal stimulus expected next year likely to boost price pressures, but still leave them below Fed targets. The Fed has said it will allow inflation to run hotter than its previous 2% target before tightening monetary policy. November 19 Thursday 3:00PM New York / 2000 GMT Price US T BONDS DEC0 173-8/32 0-23/32 10YR TNotes DEC0 138-96/256 0-48/256 Price Current Net Yield % Change (bps) Three-month bills 0.065 0.0659 -0.020 Six-month bills 0.0925 0.0938 0.003 Two-year note 99-234/256 0.1693 -0.006 Three-year note 100-20/256 0.2237 -0.005 Five-year note 99-86/256 0.3857 -0.012 Seven-year note 99-40/256 0.6243 -0.019 10-year note 100-48/256 0.8554 -0.027 20-year bond 100 1.375 -0.046 30-year bond 101-32/256 1.5778 -0.042 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 8.25 0.25 spread U.S. 3-year dollar swap 7.50 0.25 spread U.S. 5-year dollar swap 6.00 0.00 spread U.S. 10-year dollar swap 0.00 0.50 spread U.S. 30-year dollar swap -31.75 0.50 spread (Reporting by Karen Brettell; Additional reporting by Alden Bentley; Editing by Jonathan Oatis and Matthew Lewis)