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Yields extend gains; 10-year note hits 2%

Richard Cano | E+ | Getty Images

Benchmark U.S. Treasury yields traded above 2 percent on Thursday after the Treasury Department sold $29 billion in seven-year notes at a high yield of 1.792 percent.

Demand during the auction was weak as the bid-to-cover ratio, an indicator of demand, was 2.32, down from a recent average of 2.50. Wednesday's five-year notes auction also saw weak demand, as the bid-to-cover ratio the lowest since July 2009.

Indirect bidders were 50.5 percent, slightly higher than a recent average of 49 percent, while direct bidders made up 12.3 percent, down from the recent average of 15 percent.

The seven-year Treasury note yield last traded at 1.7800 percent, up from 1.7776 shortly after the auction. Yields on the 30-year Treasury traded higher at 2.5833 percent. Ten-year note yields last traded at 2.0009 percent.

Thursday's auction was the final auction of this week's sale of $90 billion worth of fixed-rate instruments issued in two-, five- and seven-year securities.

Earlier, U.S. Treasury yields rose amid lower-than-expected jobless claims. The number of Americans filing new claims for unemployment benefits fell more than expected last week pointing to a healthy and expanding labor market.

Initial claims for state unemployment benefits dropped 9,000 to a seasonally adjusted 282,000 for the week ended March 21, the Labor Department said on Thursday. That was the lowest level since mid-February.

Claims for the prior week were unrevised. Economists polled by Reuters had forecast claims dipping to 290,000 last week.

U.S. Markets Overview: Treasurys chart

Read MoreIs Yemen the new catalyst for oil?

Tensions in the Middle East caused oil prices to surge on Thursday after Saudi Arabia and its Gulf Arab allies began a military operation in Yemen.

Brent crude oil futures traded over $59 a barrel, while U.S. crude climbed over $2 to trade above $51 a barrel.

U.S. Federal Reserve policymaker James Bullard said now may be a good time to start normalizing U.S. monetary policy, in a speech to an audience in Frankfurt.

The St. Louis Fed President said doing that would direct policy "appropriately for an improving economy over the next two years."

—Reuters contributed to this report.