Prices for U.S. Treasurys rose on Wednesday after tepid jobs and service sector data dampened hopes for key labor market figures due on Friday.
Benchmark yields touched three-month lows after data from payroll processor ADP showed U.S. private-sector employment rose by 158,000 jobs in March, less than expected. The Institute for Supply Management also reported that U.S. service sector growth slowed in March to the lowest level in seven months.
"We are revising our forecast for March nonfarm payrolls down 40,000 to 160,000," said Joseph LaVorgna, managing director and chief U.S. economist at Deutsche Bank Securities.
Such views were "bullish for bonds, which are testing the low end of their recent yield range," said Jake Lowery, Treasury trader at ING in Atlanta, Georgia.
Benchmark 10-year notes, down 3/32 of a point before these reports became available, rose 15/32 in the New York afternoon, the yield easing to 1.811 percent.
"We see a 1.73 percent to 2.07 percent range for 10-year yields; slightly longer term, it looks like 2.15 percent to 1.73 percent," said William O'Donnell, head of U.S. Treasury strategy at RBS Securities in Stamford, Connecticut. "Near-term resistance is around 1.83 percent."
Analysts in a Reuters poll forecast a rise in nonfarm payrolls of 200,000 for March.
Now that expectations have been tempered by the ADP data, a payrolls jump of 200,000 or more could prompt a drop in bond prices.
But the magnitude of a retreat might be relatively modest since bond investors had leaned toward being short, based on how strong recent U.S. economic data had been, Lowery said.
"The magnitude of a setback could be less than what it would have been had investors been positioned quite long."
But the medium- and long-term trend for the labor market will also be important, said Steve Van Order, fixed income strategist with Calvert Investments in Bethesda, Maryland.
If the unemployment rate edges down toward 7.4 percent before the Fed's year-end expectations - "then the probability of QE being tapered goes up in the market," he said.
The U.S. Federal Reserve is now buying $85 billion of mortgage-backed securities and U.S. government debt per month. Investors are trying to figure out when the Fed might pull back on that aggressive easing.
Policymakers have said they want to see the unemployment rate, currently at 7.7 percent, closer to 6.5 percent.
As part of its unconventional monetary easing, the Fed bought $3.73 billion of Treasurys maturing between February 2019 and March 2020 on Wednesday.