Prices for U.S. Treasurys fell on Thursday as signs of life in the euro zone economy renewed recent bearishness, although a strong sale of 30-year debt tempered losses.
While holding interest rates at a record low, the European Central Bank on Thursday said the monetary union's economy will recover later in 2013 and that there are already some signs of stabilization.
The ECB "brought a great bit of selling and renewed bear steepening into the market through all the morning, and that was the guiding thought," said Jim Vogel, interest rate strategist at FTN Financial in Memphis, Tennessee.
Taking the edge off losses, a $13 billion auction of 30-year bonds on Thursday fetched a high yield of 3.070 percent, lower than markets had expected.
"While there was not any one extremely strong auction statistic, we had above-average numbers across the board worthy of a B-plus," said George Goncalves, head of rates strategy in the Americas for Nomura Securities.
"Overall, this was a solid auction and shows that there is life after (the Fed's Operation) Twist given that QE4 is still supportive of bonds," he added.
(Read More: Rising Bond Yields—This Is Just the Start)
The central bank's "Operation Twist" stimulus program, under which it sold shorter-dated Treasurys and bought longer-dated debt, expired at year-end.
The Fed is now buying about $40 billion per month of mortgage-backed securities and $45 billion per month of longer-dated Treasurys in an effort to prop up the economy. Some analysts have dubbed the Fed purchase programs "QE4."
Ten-year Treasurys were last down 11/32 in price to yield 1.899 percent, up from 1.86 percent late on Wednesday.
Thirty-year Treasurys fell 12/32 in price to yield 3.081 percent, up from 3.06 percent on Wednesday. Those prices pared losses sharply after the auction and even briefly turned positive.
Yields are trading near eight-month highs after minutes released last week from the Federal Reserve's December meeting sparked speculation that the U.S. central bank may end its bond purchase program before year-end, sooner than most expected.
"When the minutes came out it put doubt in people's minds about the duration on bond purchases, all of a sudden people started to think that maybe it's not going to happen through the balance of this year," said Tom Tucci, head of Treasurys trading at CIBC in New York.
Investors will now be closely watching a speech that Fed Chairman Ben Bernanke is due to give on Monday at the University of Michigan for any further indications of how long the Fed's latest bond purchase program will last.
Much, however, is likely to depend on the economy as Bernanke has said he wants to continue stimulus until the economy is on surer footing and unemployment drops significantly.
"The real crisis we are faced with is getting our economy to grow at a rate that creates jobs," said David Coard, head of fixed income sales and trading at The Williams Capital Group in New York.
The resolution of the so-called "fiscal cliff" has also dampened the safety bid for U.S. debt since the beginning of the year.
But bigger battles scheduled for the weeks ahead on how to cut spending and reducing the deficit may bring buyers back to the debt.
"We still have the spending debate that could become increasingly tricky. I've got to believe that with that looming out there it's hard to really feel comfortable about ranges," said Coard.
The Fed bought $3.16 billion in notes due from 2020 and 2022 on Thursday as part of its bond purchase program, which is designed to reduce borrowing rates and spur hiring.
(Read More: Fed Bond Buying Will Run for a 'Long Time')
In addition, the U.S. high-grade market set a weekly volume record on Thursday, despite indications that investors and issuers alike are growing increasingly anxious about the months ahead.
The week's investment-grade volume hit $41.61 billion, topping the previous best of $40.642 billion, Thomson Reuters