Benchmark U.S. yields briefly topped the key 3 percent level on Thursday as stronger-than-expected U.S. economic data reinforced views the Federal Reserve could slow its massive bond buying program soon, prompting a global bond rout.
A report from the Institute for Supply Management showed services industries in August posted their fastest growth since December 2005, well above expectations.
Yields on 10-year Treasurys jumped to 25-month highs after the news, notching a fourth straight session of gains.
"You are seeing a normalization in the economy so you should see a normalization in rates," said Craig Elder, fixed income strategist at Baird Private Wealth Management in Milwaukee.
Elder and other analysts say the 10-year yield could break above 3 percent if an August payrolls report, due Friday, adds more support to a Fed pullback on the bank's $85 billion per month in buying of Treasuries and mortgage-backed securities.
As the world's biggest economy has grown stronger, Fed policymakers have increasingly hinted at finding an exit from the so-called quantitative easing program.
The labor market will be a key factor in the Fed's decision. Policymakers want to see the unemployment rate closer to 6.5 percent from its current 7.4 percent.
A solid payrolls figure could help convince the Fed that withdrawing some of their stimulus won't knock a labor market recovery back.
But a disappointing payrolls report - or suggestions that the United States is getting closer to a military strike against Syria to punish that country for using chemical weapons — could easily push the 10-year yield to 2.75 percent, analysts say.
Still, U.S. economic data have been mixed enough that tapering at the Fed's Sept. 17-18 meeting is not a given.
For example, U.S. private employers added 176,000 jobs in August, according to payrolls processor ADP on Thursday. That number was strong — but not strong enough to ease jitters about the upcoming nonfarm payrolls report.
"This number is not a definitive number for the Fed to taper. This makes some people worry about tomorrow's payrolls number, but I still think it will be a decent one," said Robbert van Batenburg, director of market strategy at Newedge USA LLC in New York.
Economists polled by Reuters forecast U.S. employers added 180,000 jobs in August, leaving the unemployment rate unchanged from July at 7.4 percent, the lowest since December 2008.
Benchmark 10-year Treasury notes last traded down 26/32 in price, yielding 2.998 percent, from 2.897 percent late on Wednesday.
Short- and medium-term maturities were hit hard again on fears the Fed might raise short-term rates not too long after it stops buying Treasurys and mortgage-backed securities.
The two-year note yield traded above 0.50 percent for the first time since June 2011. It last traded at 0.514 percent, from 0.47 percent late on Wednesday.