NEW YORK, Oct 28: Yield spreads on US mortgage-backed securities widened versus comparable Treasuries on Friday, ending the week on a soft note after the government reported a much bigger-than-expected slowdown in US economic growth in the third quarter.

The news intensified speculation the Federal Reserve would not raise rates again and might even cut them in early 2007 to boost growth.

The surprisingly weak initial report on gross domestic product, which also showed core inflation slowing more than expected, pushed benchmark Treasury yields to their lowest levels in more than three weeks.

The move stretched the Treasury market's rally that started with the Fed's two-day policy-setting meeting earlier this week, and put bonds on track for their best weekly performance in a month.

The first reading of third-quarter gross domestic product showed a 1.6 per cent increase, falling short of an expected 2.2 per cent rise and below a 2.6 per cent advance in the second quarter. A sharp 17.4 per cent drop in housing investment, the biggest decline in 15-1/2 years, and a widening trade gap were the main factors hampering GDP growth in the prior quarter.

The central bank's policy-setting Federal Open Market Committee left interest rates steady at 5.25 per cent for a third consecutive month on Wednesday.

"We just could not keep up with Treasuries today," an analyst said. "Volatility rose, which also weighed on mortgage bonds."—Reuters