Treasury yields slip to yearly lows ... again

NEW YORK (CNNMoney.com) -- Treasury yields slid Thursday after a report from the government showed a surprise jump in initial jobless claims to the highest level in nine months.

What yields are doing: The yield on the benchmark 10-year note slipped to the lowest level since March 2009, dropping to 2.57% late Thursday from 2.63% Wednesday.

The yield on the 30-year bond fell to the lowest level since April 2009, sinking to 3.65% from 3.74%, while the yield on the 2-year note edged down to its record low of 0.49%, from 0.51% on Wednesday. The 5-year note yielded 1.40%, the lowest level since January 2009 and down from 1.45% on Wednesday.

What's moving the market: Demand for safe-haven Treasurys pressured yields as stocks slumped and a disappointing jobs report added to worries about a weak labor market.

The Labor Department said the number of Americans filing for unemployment insurance soared by 12,000 to 500,000 last week from an upwardly revised 488,000 in the previous week. That was the highest level since Nov. 14 and missed economists' forecast of a 475,000 drop.

As disappointing economic news continues to pour in, reinforcing worries about the pace of the economic recovery, the demand for Treasurys is likely to push yields even lower. But eventually, if there are signs of improvement, a sharp reversal could be in store.

"The market believes the job market is in bad shape, so [Thursday's jobs data] only confirms that belief," said Kevin Giddis, managing director of fixed income at Morgan Keegan. "That almost leaves the Treasurys market in an overbought condition which could be troublesome if we ever do get some good information."

Meanwhile, the Philadelphia Federal Reserve said Thursday that its manufacturing activity index plunged unexpectedly, dropping to negative 7.7 in August, while analysts had forecast it to rise to 7.5 from 5.1 in July.

Treasury bubble?: Because of the recent rush into Treasurys, which has pushed yields to record and yearly lows in the last week, talk about a Treasury bubble has surfaced. But Giddis called this "nonsensical."

While bubbles have formed in commodities such as oil and gold because of high volume, high prices and limited supply, Giddis said Treasurys don't fit this description.

"[Treasurys] offer safety, liquidity and currently, low returns which aren't true characteristics of a bubble," he said. "On top of that, there isn't a scarcity value in Treasurys because the Treasury can always print more, depending on the size of the budget."

The main risk for investors is if yields rise drastically or prices drop before maturity, but even this is unlikely for the time being, said Giddis.

"For that to happen in a significant way, we would have to see inflation, the fall of the dollar, the departure of the current flight to quality and a surging economy," he said. "Those conditions are not currently present."