U.S. sovereign bonds weakened on Thursday as investors reset bets that yields may increase before Friday's employment report for September.
Treasurys posted their best day since last September 2013 on Wednesday as U.S. bond yields were dragged down by rallying German government debt, weak manufacturing data in Europe and Asia and concerns over how quickly the Ebola virus may spread. Short-covering was cited as the reason for a large part of the move, with many investors positioning for yield increases this quarter as the U.S. economy shows further improvement.
"Yesterday there was pretty strong short covering, a lot of people want to be short going into nonfarm payrolls tomorrow," said Jason Rogan, a managing director in Treasurys trading at Guggenheim Securities in New York.
"Some people re-engaged shorts overnight," Rogan said, adding that some fund managers saw the yield drop to the 2.40 percent also as an attractive level to sell bond positions.
The benchmark 10-year notes were last down 15/32 in price to yield 2.44 percent, after falling as low as 2.38 percent overnight. Treasurys temporarily pared most of their price losses on Thursday as stocks dipped, but the bonds weakened again as stocks came back to trade mildly positive on the day.
"We seem to be trading tick for tick with the equity market today," said Charles Comiskey, head of Treasurys trading at Bank of Nova Scotia in New York.
Treasury weakness may also be capped by safety buying as concerns remain about world events that include civil unrest in Hong Kong, the Ebola virus and geopolitical tensions in Ukraine. "I think the market is focused on things going on around the world and the flight-to-quality trade," Comiskey said.
Meanwhile data on Thursday showing that the number of Americans filing new claims for unemployment benefits unexpectedly fell last week indicated the U.S. labor market might be tightening. Initial claims for state unemployment benefits dropped 8,000 to a seasonally adjusted 287,000 in the week ended Sept. 27, the Labor Department said.
Data Friday is expected to show that employers added 215,000 jobs in September, according to the median estimate of 100 economists polled by Reuters. The European Central Bank left interest rates unchanged on Thursday, shifting focus to an asset-buying plan with which it hopes to revive a flagging euro zone economy and see off the specter of deflation.