U.S. Treasuries prices fell Thursday after a surprise drop in weekly jobless claims eased worries about a weakening labor market added to the pressure caused by concerns about inflation.
Initial jobless claims fell 9,000 last week, contrary to expectations for an increase and also running counter to the surprisingly weak August payrolls.
The Federal Reserve cited the increased risks to economic growth from the recent credit market crunch for its half-point rate cuts on Tuesday.
"Bonds are on sale today and the curve is still steepening a little bit," said Chris Rupkey, vice president and senior financial economist at Bank of Tokyo/Mitsubishi. "Technicals broke down two days ago and each new day of lower prices brings more sellers out of the woodwork, but the trigger today was unemployment claims."
Prepared remarks by Federal Reserve Chairman Ben Bernanke, a copy of which was provided to Reuters early by a source before his appearance before a Congressional committee, appeared to have minimal market impact.
The jobless claims offered no sign that stress in financial markets was moving over into the real economy, Rupkey said.
"You can't have economic downside risks without seeing job losses and we're not seeing any job losses, so people who were looking for a 4% or 4.25% federal funds rate are getting chased out of their positions."
The Fed cut its benchmark federal funds rate by 50 basis points to 4.75% Tuesday.
Inflation concerns also weighed on bond prices, especially at the long end of the maturity range. Gold, viewed as an inflation hedge, jumped 2% to a new 28-year high at $735.65 an ounce.
Mary Beth Fisher, interest rate strategist at UBS in Stamford, Connecticut, said break even spreads on long-dated
Treasury Inflation Protected Securities or TIPS -- a gauge of investors inflation expectations -- widened.
At mid-morning, the benchmark 10-year note was down 14/32 in price for a yield of 4.60%, up from 4.57% shortly before the claims data and 4.54 % late Wednesday. Bond yields and prices move inversely.
Bernanke said delinquencies in subprime adjustable rate mortgages were likely to rise further, adding that markets tend to self-correct and that the subprime mortgage market had already adjusted sharply.
Bernanke said the Fed was committed to preventing new lending problems. He said the Fed had cut interest rates to forestall some of the adverse effects on the economy from credit market stresses.
"There was nothing particularly surprising in Bernanke's remarks so far for the bond market," said Matthew Moore, economic strategist at Banc of America Securities in New York.