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The selloff pushed Treasury yields on most tenors two to four basis points higher as of early afternoon in New York, with the benchmark 10-year's trading at 4.4%. Interest-rate swaps showed traders slightly pared bets on Fed rate cuts. They are now pricing in 42 basis points of reductions by the end of the year, with the first full cut coming by the October meeting.
'The bottom line is that the Fed can't credibly cut rates with an unemployment rate of 4.1%,' said George Catrambone, head of fixed income, DWS Americas. 'There is a glass ceiling on how high yields can push out of their current range with a Fed that's frozen in place.'
Data released Thursday showed initial claims for unemployment benefits fell to 217,000 in the week ended July 19, the lowest since mid-April. The six weeks of declines is the longest such stretch since 2022.
'The labor market deterioration has slowed or stopped, with the caveat the labor supply, immigration, negative data revisions are making reading the labor market data tricky,' said Ed Al-Hussainy, rates strategist at Columbia Threadneedle Investment.
Market expectations of rate cuts starting from late September, 'may be off the table if unemployment is unchanged next week,' he said.
European government bonds also stumbled Thursday after the European Central Bank tempered expectations of a possible interest rate cut in September.
Investors were already turning broadly more risk-on amid deals between the US and its trading partners. The European Union and the US are progressing toward an agreement that would set a 15% tariff for most imports, according to diplomats briefed on the negotiations.
Another pressure point for traders is a dispute between President Donald Trump and Federal Reserve Chair Jerome Powell over construction works, which the president has criticized for cost overruns.
Last week, Trump has said that he didn't plan to fire Powell before the end of his term. Trump was set for a tour later Thursday of the $2.5 billion renovation of the central bank's headquarters.
'The mounting risk of the Fed being seen as acting more on a political than a fundamental level is a sizable threat to long-end rates over the medium term,' Rabobank strategists wrote in a note.
Earlier on Thursday, a $21 billion auction of 10-year Treasury Inflation-Protected Securities drew solid demand.
--With assistance from Naomi Tajitsu.
(Updates prices in second paragraph, adds strategist quote.)
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