Updated from 11:08 a.m. EST

Long-dated bonds led a Treasury selloff Thursday on hawkish comments from European Central Bank president Jean-Claude Trichet and the possibility that Japan's easy money days are drawing to a close.

"Today is about positions unwinding and we should not confuse price action with new, fundamental, information," David Ader, chief U.S. government bond strategist at RBS Greenwich Capital, says in a research note. "When unwinds of magnitude take place, they have an endgame -- those positions will square and/or strong hands will dominate."

The benchmark 10-year note ended the day down 12/32 of a point to yield 4.64%, while the 30-bond sank 28/32 to yield 4.62%.

The two-year edged lower 1/32 to yield 4.72% and the five-year lost 6/32 to yield 4.71%. Bond prices and yields move in opposite directions.

The European Central Bank (ECB) raised rates by a quarter of a point to 2.50%, with indications pointing to more hikes down the road.

"Interest rates across the entire maturity spectrum still remain at very low levels in both nominal and real terms, and our monetary policy remains accommodative," Trichet said after the decision. He also said the ECB will continue to "monitor closely all developments with respect to risks to price stability."

Tony Crescenzi, chief bond market strategist at Miller, Tabak & Co. and a RealMoney.com contributor, says that Trichet sounded somewhat hawkish, and that European bonds weakened substantially after his speech.

"For one thing, rising rates worldwide diminish the interest rate spread between the U.S. and countries abroad, so the U.S. won't seem as attractive," Crescenzi says. "Money might stay at home in these countries.

If foreign investors diversify from the U.S. bond market, that could have a substantial impact now that foreign investors own more than half the Treasury market alone. Economists and investors, including Steve Bohlin, portfolio manager at Thornburg Investment Management, say foreigners must continue to buy the U.S. bond market in order to keep long-term rates low and fund our budget deficits.

Bohlin notes that the Treasury market has been the only safe haven in which foreign investors could get real return relative to other countries.

News tonight in Japan will be important, as the Bank of Japan announces whether it, too, will begin to raise short-term rates from historically low levels.

Like the U.S. in 1994 and 2004, the world's second-largest economy is seeking to emerge from a period of negative real rates.

However, in his campaign to ready the markets for a change in banking policy, BoJ Governor Toshihiko Fukui has implied that rates will not jump right away. Rather the central bank will gradually reduce the amount of money it makes available as reserves to banks, now between 30 trillion yen and 35 trillion yen, well above the legal limit of approximately 6 trillion.

"Tokyo CPI is out tonight, and seen down 0.2% month-on-month. If that consensus call holds, it could cool some of the BoJ tightening calls and remind us that they have told us the process will be very gradual indeed," writes Ader.

In addition to news abroad, job data at home fed inflation worries and weighed on Treasuries.

Initial claims for unemployment benefits rose by 15,000 to 294,000 in the week ended Feb. 25, the Labor Department said. While the reading was a touch higher than Wall Street forecasts for the number to rise to 285,000, it was still the seventh straight week that weekly claims have come in below 300,000. The four-week moving average came in at 287,000.

"The labor story is intact and that's worrying enough for people looking at inflation," says Crescenzi.

Fed policymakers have been carefully monitoring the employment picture because they believe the U.S. is close to full employment, meaning 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 market is facing a payroll number that could be strong again because of these low claims readings," Crescenzi said, referring to the closely watched February payrolls report due out next Friday.

Executive outplacement firm Challenger, Gray & Christmas also reported a 15% decline in February corporate layoff announcements from the previous month. At 87,000, the firm says announcements are down 19% year-on-year.

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