U.S. Treasury debt prices fell Thursday as unexpectedly firm data and signs of improvement in recently troubled credit markets dimmed the allure of safe-haven government bonds.
Though many traders still consider the economy to be going through a rough patch, the day's offering of jobs and factory figures came up short of their most dire forecasts. This pulled short-dated yields off three-year lows hit earlier in the session.
Evidence also emerged from short-term lending markets that borrowers were finding it easier to get ahold of badly needed cash, marking an improvement from the tumultuous end of 2007 when credit conditions tightened severely.
This left the bond market looking slightly less pessimistic on the economy heading into Friday's monthly job market report from the government, which will be the week's biggest economic release.
"The bond market tends to price in the absolute worst and and I think we're getting up to that area again where the bond market has priced in a really, extremely sluggish economy," said Carley Garner, senior analyst at Alaron Trading in Las Vegas.
"So it seems to me that even when numbers that come in not outstanding but not terrible either they are going to be bond-bearish."
Benchmark 10-year notes fell 9/32 in price, to yield 3.94 percent. Two-year notes turned flat to yield 2.87 percent.
Earlier gains in two-year notes had pushed yields down as far as 2.79 percent, their lowest since late 2004.
An 'Excuse' to Take Profits
Weekly claims for jobless benefits posted an unexpectedly sharp drop, causing bonds to turn tail after the earlier rally.
Another report showed U.S. private employers added 40,000 jobs in December. This was a steep drop from the previous month but still better than some expected after data on Wednesday showed the factory sector contracted in December.
November factory orders data came out much stronger than expected. Dealers said this added to profit-taking momentum in the bond market.
"Given the gains of the past week or so, the market was ripe for a little profit-taking correction anyway so the numbers this morning provided a handy excuse for what was likely to happen regardless," said John Canavan, analyst at Stone and McCarthy Research Associates in Princeton, New Jersey.
Investors focused on recent troubles in the credit market found more reasons to sell safe-haven government bonds. London interbank offered rates, key benchmarks for lending between banks, fell again on Thursday, continuing a drift lower following aggressive central bank liquidity injections last month and the passing of year-end funding concerns.
In a further sign that credit market tension was easing, the size of the U.S. commercial paper market increased in the week ended Jan. 2, with the amount of asset-backed commercial paper outstanding rising for the first time in 21 weeks.
"That is a sign that that part of the credit markets has clearly stabilized," said Jeff Hlavacek, director of fixed-income trading at BNP Paribas in New York.
However, he said this would not reverse expectations that the Federal Reserve would still have to lower benchmark interest rates to shore up the economy.
"I think what we're probably going to see is a shift from an easing to stem the credit market crisis to an easing to support weaker than expected economic growth, which is probably going to be exacerbated to some extent by weakening global economies," said Hlavacek.