US Treasury debt prices fell on Thursday as robust growth in the services sector and a drop in jobless claims contradicted views of a slowing economy, leaving investors cautious ahead of Friday's jobs report.
However, bonds clawed back some losses on mild short covering, after sliding on the stronger-than-expected performance in services, which make up about 80 percent of the US economy.
The services data, coming on the heels of reports this week showing unexpected strength in US manufacturing and durable goods orders, suggested to investors the Federal Reserve has less reason to cut official interest rates this year.
"The market is a little bit nervous about the last few numbers coming in stronger than expected. They are not sure what to make of it, so there is general caution," said Josh Stiles, senior bond strategist at IDEAglobal.com in New York.
Benchmark 10-year notes were trading 6/32 lower in price for a yield of 4.68 percent from 4.65 percent late on Wednesday. Yields, which move inversely to prices, briefly rose to 4.69 percent during the session.
"It's just a little bit of short covering ahead of the employment report tomorrow, but it's really pretty quiet out there right now. The market was a little bit oversold," said Mary Ann Hurley, vice president of fixed-income trading at D.A. Davidson & Co in Seattle.
The price action on Thursday saw the spread between two-year and 10-year Treasury notes back in negative terrain and at its most inverted in six weeks. Two-year notes are most sensitive to interest rate expectations.
But analysts said there was scope for demand for shorter-dated maturities, given next week's $32 billion second-quarter refunding, if nonfarm payrolls surprise sharply on the downside on Friday.
Traders were betting on Thursday that US employers added 88,800 jobs in April, according to the preliminary implied median market forecast of a derivatives auction. The result was below the 96,100 jobs implied in an auction on Wednesday.
Bonds already had eased earlier in the session after data showing weekly jobless claims fell to their lowest level since January, suggesting that the labour market remained tight despite troubles in the housing sector. Analysts reckon the US Federal Reserve will probably want to see signs of stress in the labour market before it can ease monetary policy.
Bond prices were also undermined by stronger stocks, with the Standard & Poor's 500 stock index pushing past 1,500 for the first time since September 2000. As well as the stronger-than-expected services report, data showed business productivity grew at a greater-than-expected 1.7 percent annual rate in the first quarter. US unit labour costs grew at a 0.6 percent rate in the same period, which was well below the 4 percent rise analysts were expecting. Investors closely watch unit labour costs for any sign that wage pressures might be contributing to price inflation.
Two-year notes traded 3/32 lower in price for a yield of 4.71 percent from 4.65 percent late on Wednesday, while 30-year bonds fell 10/32 in price for a yield of 4.84 percent from 4.82 percent.