U.S. Treasurys fell Thursday as jobless claims data raised expectations of an improving labor market in coming months, driving a stock rally that drew investors out of safe-haven government debt.
New claims for jobless benefits fell to a more than 2-1/2-year low of 368,000 last week, a level typically associated with faster job creation. A decline in oil prices also drove investors' risk appetite.
"The risk trade is back on, and bonds are focused on the economy's fundamentals," said Jason Weiner, portfolio manager of the Marshall Aggregate Bond Fund in Atlanta, Georgia.
"The claims data was very strong and supplanted fears about the Middle East and oil prices," he said.
The jobless claims data comes a day ahead of the U.S. government's closely watched monthly payrolls report.
Technicals reinforced the move because stocks were "oversold" and bonds "overbought" at the end of February, Weiner added.
The U.S. 10-year note yield hovered at support at 3.56 percent while the five-year note yield moved through support at 2.26 percent to 2.29 percent.
"Longer-term Treasury yields will move higher because fundamentals support the idea of 4 percent GDP growth in 2011, and that should push bond yields higher, maybe a percent or more higher on the 10-year note yield," Weiner said.
David Ader, head of government bond strategy at CRT Capital Group in Stamford, Connecticut, said the bond market focused on "the consistency with which the labor market is improving across many, if not most measures.
"This raises the stakes for a big gain...sometime...in the monthly (U.S. non-farm payrolls) series."
The median forecast of a Reuters poll is for U.S. non-farm payroll growth of 185,000 in February, up from 36,000 new jobs in January.
The Institute for Supply Management's non-manufacturing index released on Thursday showed that sector of the U.S. economy expanded in February.
The market focused on the report's employment index, which, according to Goldman Sachs economists, suggested that labor market fundamentals "continue to improve.
"We continue to see some upside risk to our 200,000 forecast for the increase in nonfarm payrolls in tomorrow's employment report," the Goldman economists said.
With the weekly unemployment claims "diving lower, there must be a lot of new jobs getting created out there and payroll jobs are the one number that can really turn the markets upside down and spin expectations 180 degrees," said Chris Rupkey, chief financial economist at Bank of Tokyo/Mitsubishi UFJ.
January payroll growth was hurt by snowstorms, and the market is bracing for a "well-advertised big jump in payroll jobs in February," Rupkey added, noting that job growth totaled 705,000 the month after the blizzard of 1996.
"A 300,000 monthly payroll jobs number is not impossible tomorrow," he said.
The New York Fed bought $7.240 billion in Treasury coupons with maturities ranging from May 15, 2018, to Feb. 15, 2021, as part of its ongoing program to spur economic growth.
The U.S. Treasury said it would sell $32 billion in three-year notes, $21 billion in nine-year 11-month notes, and $13 billion in 29-year 11-month bonds on Tuesday, Wednesday and Thursday of the coming week.
Prices of two-year notes fell 3/32, their yields rising to 0.75 percent from at 0.70 percent Wednesday.
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