US Treasury prices slid on Tuesday as a strong employment reading in a closely watched manufacturing survey suggested the Federal Reserve would raise interest rates in June.
The market's focus is zooming in on Friday's US payrolls report, where any surprise decline in job growth is viewed as the last possible stumbling block to a June rate hike from the central bank.
A jump in factory employment in Tuesday's report from the Institute for Supply Management left bond bulls little hope the central bank might hold off.
Stubbornly high prices paid reported in the index only reinforced the chances the Fed would have to move quickly in order to avert a bout of inflation.
"Manufacturers are showing widening pressures on the prices they pay for many goods," said Carl Tannenbaum, chief economist at LaSalle Bank. "It's something the Fed will really need to be aware of".
The strength in both jobs and prices took a heavy toll on the two-year Treasury note which slid 3/32 in price for a yield of 2.60 percent from 2.54 percent on Friday. Just three months ago, short-term yields stood at 1.46 percent.
The benchmark 10-year Treasury note slipped 10/32 in price, lifting its yield to 4.70 percent from 4.65 on Friday.
Five-year notes lost 6/32, lifting yields to 3.84 percent from 3.80 percent. The 30-year bond shed 24/32, taking its yield to 5.40 percent from 5.34 percent.
Eurodollar futures were showing a 90 percent chance of a quarter percentage point hike in the 1.00 percent funds rate at the Fed's next meeting on June 29-30, and the market has discounted rates of more than 2.00 percent by year-end.
The Institute for Supply Management said its index of nation-wide manufacturing rose to 62.8 in May from 62.4 in April. Economists had looked for a slight pullback to 62.0 but speculators were betting on a sizable rise in the index after a stunning jump in the Chicago-area PMI reported on Friday.
Still, the ISM employment index did climb to a 31-year high, supporting those calling for a big gain in the May payrolls report due on Friday.
Analysts generally expect that report to show a rise of around 216,000, and an even bigger gain could stir concerns the Fed will have to be more aggressive in raising rates.