Treasury prices fell Thursday amid worries about an increase in debt supply.
Bond yields, which move opposite to their prices, had fallen too low in recent days to make new debt being auctioned next week very attractive, said Nick Kalivas, a vice president of financial research at MF Global. Investors typically sell out of Treasurys ahead of auctions to maximize yields on the new debt being issued.
The government is scheduled to sell three-year notes, 10-year notes and 30-year bonds next week.
Capital raising plans by Bank of America Corp. and rumors Japan might sell as much as $100 billion of its U.S. Treasurys holdings helped fuel Thursday's sell-off.
Tom di Galoma, head of U.S. rates trading at Guggenheim Partners, said the Japan talk is "pure speculation at this point." However, he said the market is prone to trade on rumors when there is little hard news to move it.
The price of the 10-year Treasury note, which is often used as a benchmark for consumer loans, fell 18/32 to 99 30/32 in late trading. That sent its yield up to 3.38 percent from 3.32 percent late Wednesday.
If concerns about oversupply continue to grow, the yield on the 10-year note could go as high as 3.50 percent, MF Global's Kalivas said.
Charlotte, N.C.-based Bank of America is expected to raise nearly $20 billion in the coming days to help repay government loans it received during the peak of the credit crisis, further adding to concerns of saturation on credit markets.
The worries about a glut of supply in bond markets comes at the same time central banks are planning to curtail programs that have kept interest rates low and boosted demand for debt.
European Central Bank President Jean-Claude Trichet said Thursday the bank will start winding down some of the measures it took to stimulate the economy and credit markets. The end of those programs could push interest rates higher and weaken demand for bonds.
Many analysts say the bond market was due for a sell-off anyway following its surge last week. Treasurys had risen sharply amid worries that a Dubai investment fund could default on its debt and touch off a new round of broader credit problems. Those concerns have since eased, opening the way for Treasury prices to drop to levels they were trading at before the scare.
Yields on the 10-year note fell as low as 3.20 percent on Monday. Thirty-year bond yields dropped as low as 4.20 percent. That helped mortgage rtes, which often track bond yields, fall to a record low this week of 4.71 percent, according to Freddie Mac.
The Labor Department's report on November employment is likely to affect trading Friday. An increase in the unemployment rate could spook investors and push them back into safe havens like government-backed debt.
Stock fell late Thursday ahead of the report. The Dow Jones industrial average dropped 87 points.
In other trading, the price of the 30-year bond fell 1 10/32 to 100 21/32. Its yield rose to 4.34 percent from 4.25 percent.
The price of the three-year note fell 2/32 to 100 16/32, sending its yield up to 1.20 percent from 1.18 percent.
The yield on the three-month T-bill was flat at 0.04 percent. Its discount rate was at 0.05 percent.
The cost of borrowing between banks increased fractionally. The British Bankers' Association said the rate on three-month loans in dollars _ the London Interbank Offered Rate, or Libor _ rose to 0.2553 percent from 0.2550 percent.