Investors sell bonds as jobs picture improves

New claims for US jobless benefits fell sharply last week, dropping 37,000 to 391,000, their lowest level since April, the government said.

"This is a number that's going to make people rethink some of their trends and their interpretation of nonfarm payrolls next week," said Jim Vogel, interest rate strategist at FTN Financial in Memphis, Tennessee.

"The US economy has been slipped under the radar, but next week's going to bring it back into full focus," he added.

Separately, the US economy grew slightly more than previously reported in the second quarter, according to the government's final report on that quarter's gross domestic product. GDP was helped by consumer spending and export growth that was stronger than earlier estimated.

Benchmark 10-year Treasury yields rose to 2 percent, near their highest levels in around one-and-a-half weeks, from 1.99 percent late on Wednesday.

Bond trading this week has been largely driven by European headlines, with increasing optimism that European lawmakers will take larger measures to contain the region's debt crisis sending Treasuries yields up off more than 60-year lows.

Selling has, however, been tempered by the likelihood that new concerns over the region will renew demand for safe haven US bonds.

A dramatic drop in inflation expectations, meanwhile, has kept speculation alive that the Federal Reserve will need to launch a new round of stimulus to stop the economy from contracting, a move that would likely help bonds.

Federal Chairman Ben Bernanke said on Wednesday that the central bank may need to ease monetary policy further if inflation or inflation expectations fall significantly.

Inflation expectations as measured by 10-year Treasuryinflation-protected securities fell to 1.70 percent last week, the lowest since September 2010. It has edged up slightly since then and last stood at 1.87 percent.

Long-term Treasury yields have given up almost all of their gains since the Fed last week said it would launch a new program to buy longer-term bonds, and sell short-dated notes, in a bid to lower borrowing rates and increase lending.

The Treasury will also auction $29 billion in seven-year notes later on Thursday, the last of $99 billion in new sales this week.

Copyright Reuters, 2011