Bond Brief: Jobless Selloff

Updated from 11:00 a.m. EDT

Treasuries were hammered Thursday by the threat of a strong monthly payrolls report and evidence that liquidity around the world is set to tighten.

The benchmark 10-year note fell 12/32 to yield 4.89%, the highest level since June 2002, while the 30-year bond sank 28/32 to yield 4.96%. Bond prices and yields move in opposite directions.

The two-year note edged lower 2/32 to yield 4.83%, and the five-year note lost 6/32 to also yield 4.83%.

Nearly two weeks of declines have built a risk premium back into the long end, in the form of higher yields, and widened the spread between the 10-year and two-year yields to six basis points. Longer-maturity debt usually yields more than shorter-maturity debt to compensate investors for lending money for a longer period of time.

However, the curve has been flat or even inverted since the beginning of the year, a phenomenon Alan Greenspan called a "conundrum" and one that often precedes recession.

"I wouldn't say that the conundrum has significantly ended yet," says John Shin, senior economist at Lehman Brothers. "A lot of [the slide on the long end] is in anticipation of tomorrow's jobs report."

Along with the housing market, the employment picture is seen as the key to when the "data-dependent" Federal Reserve will stop raising interest rates. Fed funds futures have priced in 100% odds that the Fed will raise rates by 25 basis points in May, taking the rate to 5.0%. But there are only 34% odds for a hike at the June meeting.

Central bankers have voiced concerns that "wage inflation" could occur if unemployment drops and salaries increase enough to ramp up consumer spending.

The March nonfarm payroll report is expected to hold steady at 190,000 and the unemployment rate is expected to edge lower to 4.7% from 4.8%.