U.S. Treasurys traded sideways on Thursday with yields holding near their four-month lows as investors waited on Friday's highly anticipated payrolls employment report for signs whether the pace of economic growth is worsening more than expected.
Treasurys have rallied in the past week as more data points to slowing growth and inflation remains subdued, with many investors now taking a much more bearish view of the economy than in the first quarter.
The slowing economy has also led some to expect the Federal Reserve may continue its bond purchase program for longer than was previously expected, or increase the size of its monthly buybacks, in bid to propel growth.
The Fed said on Wednesday that it may increase or decrease its monthly bond purchases depending on the unemployment level and inflation. Most economists had thought the Fed would taper purchases in the second half of this year, and end them by the first quarter of 2014.
"All that talk of the Fed tapering purchases in the third or fourth quarter, the chances of that look very low," said Tom Graff, fixed-income portfolio manager at Brown Advisory in Baltimore, Maryland. "Meanwhile, the chances of them increasing QE bond purchases are probably around 50-50 now."
The U.S. central bank bought $1.53 billion in bonds due between 2036 and 2042 on Thursday as part of this program.
Benchmark 10-year notes yielded 1.62 percent on Thursday. They have fallen from over 1.70 percent a week ago and as high as 2.09 percent in March.
Increasing chatter that the Treasury may cut issuance of coupon-bearing debt as the deficit improves is also seen as having added a bid to the bonds. The Treasury said on Wednesday it would consider cuts, following weeks of market speculation that cuts may be imminent.
The Treasury has been slashing issuance of Treasury bills as it accumulates more cash from strong tax receipts and prepares for a new round of negotiations over raising the debt ceiling later this month.
The expectation of additional purchases by foreign central banks including the Bank of Japan has also added to demand for the U.S. government debt.
"There's been an accumulation of influences that have driven rates to this point, the fear that the Fed would turn very dovish, combined with the fear of Japanese and other Asian buying, and rumors of immediate issuance cuts coming from Treasury," said Aaron Kohli, an interest rate strategist at BNP Paribas in New York.
The rally may have run too far too fast however, with most of these factors still under discussion, rather than being executed as yet, said Kohli. "All of those are to some extent more fears at this point than actual realizations," he said.
Kohli expects a mild beat or miss from consensus expectations for payrolls on Friday could cause a small selloff or rally in bonds, but said that a very negative number would be needed for benchmark 10-year notes to crack below the key 1.60 percent level.
If the yields drop below 1.60 percent, "at that point you are getting into a zone that is normally reserved for times of immediate crisis," he said.
Employers are expected to have added 145,000 jobs to their payrolls in April, according to the median of estimates by economists polled by Reuters.