Updated from 11:51 a.m. EST
Treasuries sank Thursday on upbeat employment data that could rev up inflation concerns at the
and a lackluster auction of five-year notes.
The market is also looking ahead to Friday's release on durable orders, which are considered a leading indicator of manufacturing activity.
The benchmark 10-year note ended the day down 8/32 of a point to yield 4.56%, while the 30-year bond was off 12/32 to yield 4.50%. The five-year lost 6/32 to yield 4.61%, and the two-year edged lower 3/32 to yield 4.712%.
Bond prices and yields move in opposite directions.
A disappointing $14 billion auction of five-year notes kept the pressure on prices, with the issue drawing a yield of 4.622%. The auction also drew a 2.18 bid-to-cover ratio, vs. the 12-month average of 2.48.
Indirect bidders, a category that includes foreign direct investors, took 21.3% of the issue, much lower than the 12-month average of 37.2%.
Treasury auctions are closely monitored for foreign investor participation, since their share of the market has increased to 52% as of November 2005, up from less than 35% in 2001. Foreign Treasury buying has kept long-term rates low in the U.S., fueling sectors including housing and consumer spending.
Prior to the auction, Treasuries were already lower after the Labor Department said that first-time jobless claims for the week ending Feb. 19 fell to 278,000, from 298,000 the week earlier, vs. expectations for claims to rise to 300,000.
Fed policymakers have been carefully monitoring the employment picture because the U.S. is close to "full employment," or the lowest level of unemployment possible before wage inflation sets in. Bond traders loathe inflation because it erodes the value of fixed-income investments.
The jobs picture looks robust, but fixed-income strategists at Barclays Capital are wary of the unemployment numbers.
"Since late December, the jobless claims data have run remarkably low ... however, a good deal of this strength has likely been driven by unseasonably warm weather nationally," according to a research note from the firm. "This January was the warmest on record in the U.S., and probably prevented a large number of the seasonal layoffs typically seen at this time of year."
Meanwhile, mortgage rates continue to remain low, with
reporting that mortgage rates across the board slipped last week. The average 30-year mortgage dipped to 6.26% from 6.28%.
Proof of strong demand for longer-dated maturities would also help explain ultra-low rates on the long end of the curve that have moved lower than rates on the short end, a.k.a. an inverted yield curve.
Longer-dated maturities such as the 10-year note and the 30-year bond typically yield more than shorter-dated notes, because it's riskier to loan money for longer periods of time, even if it's Uncle Sam doing the borrowing.
An inversion in the curve implies that investors see more risk in the near term, and it has been a reliable leading indicator of economic slowdowns in the past.
But Fed Chairman Ben Bernanke said during his congressional testimony last week that the inverted yield curve isn't a major concern, in part because foreign buying has suppressed yield prices on the long end.
In Fed news, soon-to-be-retired Vice Chairman Roger Ferguson, who leaves his post effective April 28, stayed well within the Fed official script, saying that the economy is strong that growth is sustainable so long as inflation remains contained.
In a speech made Thursday, he told a group of insurers that low rates are adding more risk to their portfolios but did not comment on his resignation.
Anthony Santomero of the Philadelphia Fed also said that he thinks inflation will stay low and that the central bank is coming to the end of its monetary tightening campaign. He added that housing market softness and higher energy costs are the real threats to the economy.
Santomero's comments did little to help Treasuries, but they lifted the BKW Banking Index and helped pushed
to historic highs.
A total of five Fed officials will speak today and tomorrow about the economy, including Ben Bernanke, Richard Fisher of the Dallas Fed branch and St. Louis Fed President William Poole.