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By Richard Leong and Karen Brettell
NEW YORK (Reuters) - Benchmark U.S. Treasuries yields jumped to two-year highs on Thursday as encouraging jobless claims data reinforced the view that the Federal Reserve is close to scaling back its bond purchases, spurring investors to reduce their debt holdings.
The bond market selloff intensified as investors who had bet that yields would fall after last week's supply were forced to exit those bullish positions, analysts said.
The total number of Americans filing for unemployment benefits for the first time last week fell to a near six-year low, the U.S. Labor Department said on Thursday. The figure suggested a moderate pace of job growth remains in place, which might be enough to allow the U.S. central bank to shrink their $85 billion monthly purchases of Treasuries and mortgage-backed securities as early as September, traders and analysts said.
Despite more evidence of healing in the labor market, the latest pop in yields fed worries about higher mortgage rates and other long-term borrowing costs, which might hamper a still uneven economic recovery, analysts said.
"The data continues to improve and impress the marketplace, and I think the data will continue in this direction," said Charles Comiskey, head of Treasuries trading at Bank of Nova Scotia in New York.
"Then the question becomes not whether they are going to taper in September, but how much they will taper."
A Reuters poll released on Wednesday showed a majority of economists expect the Fed to reduce bond purchases at its September 17-18 policy meeting, with a consensus expecting that the central bank would reduce purchases by $15 billion initially.
Speculation about the Fed reducing its bond purchases has lifted the benchmark 10-year yield by 1 percentage point in three months and widened the gap between two-year and 10-year yields to 2.41 percentage points, a level not seen in two years.
On the open market, the 10-year Treasury note last traded 13/32 lower in price with a yield of 2.761 percent, up almost 5 basis points from late on Wednesday.
The 10-year yield touched 2.823 percent shortly after the weekly claims data before it retreated on a steady pace of bargain-hunting and buying to exit short positions, analysts and traders said.
The losses on Wall Street stocks revived some safehaven bids for bonds. "We had a one-way down market in stocks which allowed for some pretty retracement in fixed income," said Alex Manzara, vice president of TJM Futures in Chicago.
The outlook for Treasuries turned more bleak with some analysts forecasting the 10-yield breaking above 3 percent by year-end.
The shift away from Treasuries has been broad-based. Treasury data released on Thursday showed foreign investors slashed their U.S. government debt in June by a record $40.8 billion.
But some fund managers said the U.S. economy is not strong enough for the Fed to slow its current pace of stimulus. They cited low inflation which is running below the Fed's target and evidence of some slowing in the factory sector.
Also another spike in bond yields will lead to higher mortgage rates and jeopardize a housing recovery that has gained traction this year, analysts said.
In an industry survey, U.S. home builders expressed worries the spike in home loan rates due to the bond market selloff in late May to June might hurt sales.
In tandem with the Treasuries sector, the yields on mortgage-backed securities jumped on Thursday. The yield on 30-year 3.5-percent coupon MBS backed by home loans guaranteed by Fannie Mae rose 14 basis points to 3.59 percent, its highest level since early July.
In other parts of the bond market, Treasury Inflation-Protected Securities lagged regular Treasuries in the wake of a mild 0.2 percent increase on the consumer price index in July.
The yield spread or the breakeven rate between 10-year TIPS and 10-year regular Treasuries shrank by over 3 basis points to 2.19 percent. The 10-year TIPS breakeven rate is seen as a gauge of investors' long-term inflation expectations.
(Editing by Kenneth Barry and Chizu Nomiyama)