Treasury debt prices fell after a surprise drop in weekly jobless claims soothed recession fears and increased expectations the Federal Reserve will raise interest rates later this year.
The market slide deepened in the wake of remarks from European Central Bank President Jean-Claude Trichet hinting at a possible rate increase by the ECB in the second half of the year to contain rising inflationary pressure.
Losses were curbed by lingering worries about the financial sector, which has been rattled by fresh speculations about write-downs and downgrades by bond rating agencies, analysts and investors said.
The latest jobless data, a day prior to the government's closely watched monthly payroll report, spurred buying in stocks and pared safe-haven bids for bonds.
"They support our belief that the economy is much better than many give it credit for," said Kim Rupert, managing director of global fixed income analysis with Action Economics in San Francisco.
The government said first-time filings for unemployment benefits slipped to 357,000 last week, the lowest in six weeks, from an upwardly revised 375,000 in the previous week.
The latest claims figure was lower than the most optimistic of 40 estimates in a recent Reuters poll.