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Bonds drop on ECB rate cut, aggressive policy move

CNBC with Reuters

U.S. Markets Overview: Treasurys chart

U.S. Treasury prices fell on Thursday, undermined by aggressive expansionary monetary policy measures from the European Central Bank, including a cut in benchmark interest rates to fresh record lows that negatively impacted inflation sensitive assets.

"One of the main reasons we are down here is because of Europe. The fact that the ECB is taking aggressive action to tackle its own maladies is likely to help risk markets in the U.S. such as equities and hurt bond markets," said Aaron Kohli, interest rate strategist at BNP Paribas in New York.

Kohli also pointed toward a calendar full of upcoming new issuance by U.S. corporate and government debt for some portion of the weakness.

Ten-year Treasury notes fell 15/32 in price, bringing the yield down to 2.45 percent, while 30-year bonds tumbled 1 6/32 in price with the yield at 3.21 percent.

The Institute for Supply Management said its services index rose to 59.6 in August—its highest level in nine years—from 58.7 in the previous month. Economists had expected a reading of 57.5, according to a Reuters survey.

Ahead of Friday's official labor market report, data showed private sector job creation growing, although jobless claims rose and productivity dipped.

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The U.S. Federal Reserve is due to purchase $1.4 billion to $1.7 billion of four-to-five-year notes on Thursday.

In the meantime, focus was on the ECB, which cut interest rates to new record lows on Thursday, unexpectedly lowering borrowing costs to try to lift inflation from rock-bottom levels and support the stagnating euro zone economy. The central bank also decided to purchase asset-backed securities, much like the Federal Reserve's quantitative easing efforts.

The ECB cut its main refinancing rate to 0.05 percent from 0.15 percent. ECB President Mario Draghi had said after the ECB's last rate cut in June that "for all the practical purposes, we have reached the lower bound."

"I guess the ECB is the predominant influence on Treasurys, but it is one of several," noted David Ader, head of government bond strategy at CRT Capital in Stamford, Connecticut.

"When you have seen the Fed do its quantitative easing episodes, Treasurys sold off. They rallied into the decision and then on the announcement they sold off because they delivered. The ECB delivered and that is deemed to be seen as either expansionary, inflationary or both and sovereign's may now underperform because of that excitement," said Ader.

Read MoreJust what are the ECB's bond-buying options?

In geopolitical news, Russian President Vladimir Putin said on Wednesday that no peace deal had yet been struck to end the bloodshed in southeast Ukraine. Negotiators representing Kiev, Moscow and pro-separatist rebels are due for more talks on Friday.

As expected, the Bank of Japan left its monetary policy on hold at the conclusion of a two-day review on Thursday.

—By CNBC. Reuters contributed to this report.