US Treasury yields slid on Thursday, pressured by falls in Europe after a surprising drop in euro zone inflation that could constrain the European Central Bank's efforts to unwind its monetary stimulus this year. Benchmark US 10-year yields dropped to two-week lows, while those on two-year notes fell to a more than one-week trough after hitting a 9-1/2-year peak the previous session.
Thursday's generally positive US economic data lifted yields, but that did not last. Analysts said investors were unlikely to make big bets ahead of Friday's US non-farm payrolls report. "Today's moves were generally overseas-driven," said Justin Lederer, Treasury analyst at Cantor Fitzgerald in New York. "We had weaker inflation in Europe and the impact spilled over to Treasuries."
Data showed euro zone inflation fell to 1.2 percent in April, according to the Eurostat flash estimate. Economists polled by Reuters had expected it to be unchanged from 1.3 percent in March. That pushed French and German 10-year government bond yields to 2-week lows after the data.
Natascha Gewaltig, director of European economics at Action Economics, said the ECB remains on track to phase out its quantitative easing by the end of 2018, but rate hikes next year have been pushed back. US yields edged up from lows after the release of US data.
Reports showed the US trade deficit narrowed sharply in March, as exports hit a record high with a surge in deliveries of commercial aircraft and soybeans. Other data on Thursday showed a modest increase in initial jobless claims last week, with the number of Americans receiving unemployment aid falling to its lowest level since 1973.
In afternoon trading, US benchmark 10-year yields fell to 2.947 percent from 2.964 percent late on Wednesday. US 30-year bonds slid to 3.122 percent, from Wednesday's 3.134 percent. US two-year yields were also down at 2.484 percent, from 2.496 percent on Wednesday. Yields fell after Wednesday's quarterly refunding announcement from the US Treasury showed an increase in the supply of government debt issuance.
Overall, analysts said the prospect of higher debt supply should keep US yields elevated. Analysts expect US nonfarm payrolls data due on Friday to show an addition of 192,000 jobs, according to a Reuters poll. "A sell-off back to recent high yields for 5s and 10s is possible (if) average hourly earnings above hit 0.3 percent or unemployment (gets) close to 3.8 percent," said Jim Vogel, interest rates strategist, at FTN Financial in Memphis, Tennessee.