US government bond prices fell Thursday, pushing yields on short-dated paper to their highest in three months, after data showing signs of resilience in the economy fueled doubts over future Fed rate cuts.
An unexpectedly low 342,000 people applied for jobless benefits in the latest week while a key gauge of corporate investment appetite held steady, according to a report on durable goods.
This sent the price on the 30-year long bond down a full point on the day and increased the gap of the two-year yield over the Federal Reserve's main target rate to its widest since June 2006.
Bond prices bounced off their lows after data showed a slump in new home sales last month, however.
"Ah, well perhaps not all is right with the world," David Ader, head of government bond strategy at RBS Greenwich Capital in Greenwich, Conn., said in a note to clients after the data.
"That's a dramatic story for new home sales and the inventory overhang persists."
The benchmark 10-year note fell 17/32 on the day, lifting its yield to 3.80 percent from Wednesday's 3.74 percent.
Two-year notes -- the most sensitive to changing expectations for Federal Reserve policy action -- were last down 4/32 on the day. The steepest losses during the session pushed two-year yields up above 2.36 percent -- the highest since January -- from 2.20 percent late on Wednesday.
The signs of strength in the jobs and durables datacome as markets have been scaling back expectations for Fed interest rate cuts. The Fed -- the US central bank -- has slashed official borrowing costs by 3 percentage points since September to calm the credit crisis that erupted last year.
"Both sets of numbers were positive for the economy," said Scott Brown, chief economist with Raymond James & Associates in St Petersburg, Fla., referring to the jobless claims and durable goods reports.
"There were no special factors for claims and the ex-transportation durables were stronger than expected. That should be negative for the bond market."
The new homes data, however, reminded markets that the origins of the economic slowdown reside in the housing market, though markets have factored in that sector's weakness.
Thursday's data might not be enough to convince economic bears, who expect the worst of the slowdown is still ahead.
The labor market is still weak overall, and the bond market reaction may be a result of expectations that have been lowered in the wake of three consecutive months of overall job losses, based on the government's nonfarm payrolls reports.
"The labor market on balance continued to be weak. April nonfarm payrolls could come in flat, which is better than what we've seen in the past three months," said Richard Dekaser, chief economist at National City Corp in Cleveland.
The fluctuations in jobless claims over the last three weeks have been the most volatile since the aftermath of Hurricane Katrina in late 2005.
The 30-year long bond was last down 28/32 on the day, pushing the yield up to 4.55 percent from 4.50 late Wednesday. Five-year notes slid 12/32 to yield 3.05 percent, up from 2.96 percent.