Treasury debt prices mostly rose Thursday after a surprisingly big jump in weekly jobless claims was taken by investors as another sign the US economy may be in, or on the brink of, recession.
Price gains were limited, however, by data showing the vast services sector contracted less than expected in March.
The number of workers applying for unemployment benefits rose to 407,000 last week -- the highest since September 2005.
The break above the 400,000 level was seen as a real signal of trouble in the U.S. economy and had investors thinking the government's March non-farm payrolls report, to be released Friday, may be weaker than originally forecast.
"It adds to fears that we are in a recession -- it was one piece of data that still did not suggest that, as long as we were below the 400,000 handle," said Kim Rupert, managing director of global fixed income analysis at Action Economics in San Francisco, adding "it was definitely bullish for Treasurys."
Benchmark 10-year Treasury notes were trading 11/32 higher in price for a yield of 3.56 percent against 3.61 percent late Wednesday.
Two-year notes were trading unchanged in price for a yield of 1.89 percent.
"(Weekly jobless) is a number that indicates that there's some softening in the labor market. People will be thinking that that softening will be reflected in the monthly employment number tomorrow," said Michael Moran, chief economist at Daiwa Securities America in New York.
The average of forecasts from analysts, according to a Reuters poll, is for employers to have cut payrolls for a third straight month in March, dropping 60,000 jobs after cutting 63,000 non-farm payrolls in February.
Bonds pared gains after data from the Institute for Supply Management showed the U.S. services sector contracted less than expected last month. The ISM non-manufacturing index came in at 49.6, slightly up from 49.3 in February. Economists on average had been looking for a March reading of 48.5.
The 50 mark on the index separates growth from contraction, and March marked the third month in a row the services sector has shrunk.
"The data is consistent with a moderate recession," said T.J. Marta, fixed income strategist with RBC Capital Markets in New York.
Testimony from Federal Reserve Chairman Ben Bernanke had little impact on the bond market, as he largely reiterated comments that he made in testimony Wednesday.
Five-year notes were trading 4/32 higher in price for a yield of 2.72 percent from 2.74 percent late Wednesday.
The 30-year bond was trading 25/32 higher in price for a yield of 4.36 percent from 4.41 percent.