U.S. yields rose as traders saw an increased likelihood that the Fed will boost its benchmark as soon as next month. A government report Friday is projected to show the U.S. unemployment rate held at the lowest since 2008.
The services report "is consistent with an optimistic outlook on the U.S. economy and certainly adds to the potential the Fed goes forward with a September rate hike," said Ian Lyngen, a government-bond strategist at CRT Capital Group LLC in Stamford, Connecticut.
Benchmark 10-year yields rose five basis points, or 0.05 percentage point, to 2.27 percent, according to Bloomberg Bond Trader data. The 2.125 percent note due in May 2025 fell about 3/8, or $3.75 per $1,000 face amount, to 98 23/32.
Two-year yields reached 0.76 percent, the highest since April 2011.
The Institute for Supply Management's non-manufacturing index jumped to 60.3, the best reading since 2005 and above the most optimistic projection in a Bloomberg survey of economists.
The Labor Department report is projected to show employers, including government agencies, took on 225,000 workers last month, while the jobless rate held at a seven-year low of 5.3 percent.
Traders are pricing in a 50 percent probability that the Fed will raise interest rates in September, based on the assumption that the effective fed funds rate will average 0.375 percent after the first increase. That compares with 42 percent a week earlier.
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With assistance from Alexandra Scaggs in New York.
