Published: Thursday, 5 Nov 2009 | 2:14 PM ET

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Big gains in U.S. workers' productivity in the third quarter supported short-dated government securities prices Thursday, while upcoming supply weighed on long-dated debt.

Meanwhile, data showing a drop in new U.S. claims for jobless benefits and the productivity gains in new U.S. claims for jobless benefits, plus the productivity gains which promised better corporate profits, pushed stocks higher. That also depleted the bid for safe-haven U.S. government debt as investors showed a willingness to shoulder riskier assets.

"The third-quarter productivity gains would limit inflation concerns to some degree, which in this environment is probably more important for what it means for Federal Reserve policy, so it is helping to support the front end," said John Canavan, analyst at Stone & McCarthy Research Associates in Princeton, N.J.

The Fed—the U.S. central bank—said Wednesday it would hold benchmark interest rates steady near zero and reiterated rates would remain low for an "extended" period.

At the same time, "positioning before next week's refunding weighs on 10s and bonds especially heavily," Canavan said.

The Treasury will auction $40 billion in three-year notes, $25 billion in 10-year notes, and $16 billion in 30-year bonds next Monday, Tuesday and Thursday, respectively.

Bond Yields

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Technical pressures contributed to the market brew.

"The long bond yield popped above the 4.37 percent to 4.38 percent area which had held fast since last August," Canavan said. "An attempt to get back through that area this morning failed, adding some technical selling pressure to the mix."

Thirty-year bonds were down 7/32 in price, their yields rising to 4.42 percent from 4.40 percent late Wednesday. Benchmark 10-year notes were down 2/32 to yield 3.54 percent, up from 3.53 percent.

"The Fed's emphasis on low interest rates and the supply dynamic led to duration sales," said Jefferies & Co chief fixed-income technical strategist John Spinello in New York.

In contrast, two-year Treasury notes yields, which are more sensitive to expectations of changes in the federal funds rate, eased to 0.89 percent from 0.91 percent late Wednesday. Five-year notes rose 4/32, their yields easing to 2.35 percent from 2.38 percent Wednesday.

The Labor Department said U.S. new jobless claims fell 20,000 to a seasonally adjusted 512,000 in the week to Oct. 31, the lowest since early January. Still, economists say new claims need to drop below 400,000 to show the economy is creating jobs.

Labor market conditions will remain a focus ahead of Friday's October U.S. nonfarm payrolls report, traders said.

The median of forecasts from economists polled by Reuters is for payrolls to have contracted by 175,000 after narrowing by 263,000 jobs in September.

Bond investors, closely attuned to Fed monetary policy and its nuances, will look at the job picture and the unemployment rate to measure the economy's unused capacity.

The Fed, in a statement on Wednesday after a two-day policy meeting, listed the economic conditions that necessitate exceptionally low rates as "low rates of resource utilization, subdued inflation trends, and stable inflation expectations."

Thursday's government report showing a 9.5 percent jump in third-quarter productivity—a six-year high—with a 5.2 percent plunge in unit labor costs strongly argued for subdued inflation, economists said.

The "astounding 9.5 percent annualized surge in nonfarm productivity in the third quarter (with) the most severe annual decline in unit labor costs in at least the last 40 years ... will feed through to lower final prices," said Paul Ashworth, senior U.S. economist at Capital Economics in Toronto. "The upshot is that deflation is still by far the biggest threat."

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