Treasury debt prices eased on Thursday as stock market strength eroded the safe-haven allure of government debt, offsetting earlier data showing higher-than-expected jobless claims.
Stocks rose by over 1 percent on Thursday after concerns eased about rising yields in some euro zone countries and on bets corporate America will beat a lowered bar for earnings expectations.
Earlier, bonds had been on a firm footing because of jobless claims data for last week that reinforced recent payrolls data showing the labor market continues to struggle.
Also, a below-forecast, zero increase in the producer price index in March fueled speculation the Federal Reserve could eventually step in with a third round of debt buying, or monetary stimulus known as quantitative easing.
Claims were the highest in almost three months and inflation pressures appear to be easing off, at least as measured by PPI, said Thomas Simons, money market economist at Jefferies & Co. in New York.
These two data points will add more fuel to the fire for the debate over QE3, he said, referring to talk that the Fed could decide to buy more Treasuries or mortgage-backed securities in a third bout of quantitative easing.
Benchmark 10-year notes were trading 6/32 lower to yield 2.06 percent, up from 2.04 percent late Thursday, while the 30-year bond was 10/32 lower to yield 3.21 percent from 3.19 percent.
Expectations of further monetary stimulus were bolstered last week after the government reported much smaller jobs growth in March than had been expected.
Federal Reserve vice chair Janet Yellen said on Wednesday the Fed has a variety of options if it decides to seek another round of asset purchases. Yellen said easy monetary policy is appropriate given high unemployment and the headwinds facing the economy as she left the door open to further action.
New York Fed president William Dudley said on Thursday that policymakers are considering the costs and benefits of additional monetary stimulus and are ready to deploy a third round of quantitative easing measures if the economic outlook were to worsen.
The Fed's current stimulus program, nicknamed Operation Twist, extends the maturity of the central bank's debt holdings and is set to expire at the end of June.
Results from the Treasury department's $21 billion offering of reopened 10-year debt on Wednesday met demand that was largely in line with market expectations. However, some data within the auction results suggested weak demand after a sharp rally in bonds since last Friday's disappointing payrolls data.
An auction of $32 billion of three-year notes on Tuesday was met with solid demand, and the Treasury is set to sell $13 billion of reopened 30-year bonds on Thursday.
In Europe, Italian three-year borrowing costs jumped more than 1 percentage point at a bond auction compared to a month ago, but 10-year debt yields in both Italy and Spain dipped, with some easing of concerns over Europe's debt troubles.