Benchmark U.S. yields neared the key 3 percent level on Thursday as better-than-expected U.S. economic data reinforced views the Federal Reserve could wind down its massive bond buying program soon, prompting a global bond rout.
A report from the Institute for Supply Management showed services industries in August posted their fastest growth since December 2005, well above expectations.
Yields on 10-year Treasuries surged to 25-month highs after the news, notching a fourth straight session of gains.
"You are seeing a normalization in the economy so you should see a normalization in rates," said Craig Elder, fixed income strategist at Baird Private Wealth Management in Milwaukee.
Elder and other analysts say the 10-year yield could break above 3 percent if an August payrolls report, due Friday, adds support for a Fed pullback on the bank's $85 billion per month in buying of Treasuries and mortgage-backed securities.
As the world's biggest economy has grown stronger, Fed policymakers have increasingly hinted they are looking to wind down the so-called quantitative easing program.
The labor market will be a key factor in the Fed's decision. Policymakers want to see the unemployment rate closer to 6.5 percent from its current 7.4 percent.
A solid payrolls figure could help convince the Fed that withdrawing some of their stimulus won't stall a labor market recovery.
But a disappointing payrolls report - or suggestions that the United States is getting closer to a military strike against Syria to punish that country for using chemical weapons - could easily push the 10-year yield to 2.75 percent, analysts say.
Still, U.S. economic data have been mixed enough that tapering at the Fed's Sept. 17-18 meeting is not a given.
For example, U.S. private employers added 176,000 jobs in August, according to payrolls processor ADP on Thursday. That number was strong - but not strong enough to ease jitters about the upcoming nonfarm payrolls report.
"This number is not a definitive number for the Fed to taper. This makes some people worry about tomorrow's payrolls number, but I still think it will be a decent one," said Robbert van Batenburg, director of market strategy at Newedge USA LLC in New York.
Economists polled by Reuters forecast U.S. employers added 180,000 jobs in August, leaving the unemployment rate unchanged from July at 7.4 percent, the lowest since December 2008.
Benchmark 10-year Treasury notes last traded down 26/32 in price, yielding 2.992 percent, from 2.897 percent late on Wednesday. The 10-year yield hit a session high of 2.994 percent on Thursday, a level not seen since July 2011.
Short- and medium-term maturities were hit hard again on fears the Fed might raise short-term rates not too long after it stops buying Treasuries and mortgage-backed securities.
The two-year note yield traded above 0.50 percent for the first time since June 2011. It last traded at 0.514 percent, from 0.47 percent late on Wednesday.
Trading volume was heavy with $298 billion of Treasuries changing hands as of noon, 58 percent above its 20-day average, according to data from ICAP, the world's largest broker of U.S. government debt.
Investors also dumped foreign bonds, sending German and British 10-year government debt yields to their highest levels in 1-1/2-years and since July 2011, respectively .
Traders received other snapshots on U.S. labor conditions on Thursday. The Labor Department said Americans filing for unemployment benefits fell to 323,000 last week, matching the level in the week of Aug. 11, which was the lowest reading since January 2008.
On the other hand, planned layoffs rose in August to 50,462, which was the highest level since February, Challenger, Gray & Christmas said.
On the supply front, the Fed bought $3.357 billion in Treasuries due November 2020 to August 2023, which was part of its planned $45 billion in government debt purchases in September.
The Treasury Department as expected pared its three-year debt offering for next week by $1 billion to $31 billion, which was the smallest amount since January 2009 when it reintroduced this maturity.
Meanwhile, the Treasury will reopen prior 10-year and 30-year issues at $21 billion and $13 billion, respectively . The auction sizes matched the previous reopenings for these longer maturities in July.