Yield curve flatter as investors doubt inflation goal

US Treasury yields dropped and the yield curve flattened on Thursday as investors grew skeptical of Federal Reserve efforts to stimulate economic growth and took stock of a report showing persistently high jobless claims.

The benchmark 10-year yield was down 2.9 basis points at 0.6576% in morning trading after touching as low as 0.646%, the lowest since Sept. 4.

The trading marked a turnaround from Wednesday afternoon, when investors seemed to accept Fed actions could bring about more inflation.

But those expectations changed as government bondholders digested the Fed's message overnight, said Andrew Richman, senior fixed income analyst for Sterling Capital Management.

"It could be a reversal of yesterday's sentiment that yes, the Fed could let inflation run high, but still there is worry that we never hit that inflation target" of 2% sought by the central bank, Richman said.

Also helping send down yields on a risk-off morning was a new Labor Department report showing the number of Americans filing new claims for unemployment benefits fell last week, but remained at an extremely high level as the jobs recovery shifts into low gear and consumer spending cools amid fading fiscal stimulus.

Wall Street's main indexes opened lower after the jobs report.

A closely watched part of the US Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes, seen as an indicator of economic expectations, was at 53 basis points, about 3 basis points lower than Wednesday's close but still above its level of 33 basis points reached on July 24.

The two-year US Treasury yield, which typically moves in step with interest rate expectations, was down a basis point at 0.129% % in morning trading.

The yield on the three-month US Treasury bill was at 0.0938%, down 1.8 basis points and the first time the measure was below 0.1% since Aug. 27.