Treasurys' losses deepened, causing a brief spike in yields, after the Fed said it was raising its discount rate by a quarter-point to 0.75%.

Government debt prices had tumbled for most of the day, sending yields higher and widening the gap between short- and longer-term debt to a record, as investors focused on some better U.S. economic data and upcoming debt sales.

After the close of stock market trading, at a time when most U.S. bond traders have shut their books for the day, the Fed said it would raise its discount rate to 0.75% from 0.5% effective on Friday.

The Fed said the move is intended to "normalize" its operations as the financial crisis winds down and said it should not be considered a tightening of monetary policy. Still, previous comments from the Fed that it was considering raising the discount rate were taken by bond and currency investors as the next step to higher benchmark interest rates. Some analysts had expected a rise in the discount rate to come at the next Fed meeting in March.

 
Following the Fed statement, yields on 10yr notes were briefly up more than 8bps for the session. They recently traded 6bps higher, at 3.8%, or slightly more than levels ahead of the announcement. 2yr note yields made a more dramatic move, rising 8bps for the session compared to gains of about 2bps earlier. They recently traded at 0.93%, a session rise of about 8bps.

 
Also Thursday, the Treasury said it plans to sell $126B in notes and bonds next week. The U.S. government said it will auction $44B in 2yr notes, $42B in 5yr notes, and $32B in 7yr notes. Treasury will also auction $8B in 30yr Treasury Inflation Protected Securities.

Treasurys had risen early as stocks futures pointed to a lower open. But bonds quickly shed those gains as investors bid up stocks on the back of a slew of U.S. economic reports.

The DJIA closed 84pts higher, at 10,393.

 
Weighing on sentiment, and supporting bonds earlier, the Labor Dept said the number of people filing initial claims for state unemployment benefits rose by 31K to a seasonally adjusted 473K last week, a sign that labor markets remain very weak. And U.S. wholesale prices jumped a seasonally adjusted 1.4% in January on double-digit increases in gasoline and home heating oil.

But two midmorning reports buoyed the outlook for the U.S. economy. New orders surged in the Philadelphia region in Feb., said the Federal Reserve Bank of Philadelphia. The Philly Fed index rose to 17.6 in February from 15.2 in January, in line with expectations of economists.

 
Plus, the Conference Board said its index of leading U.S. economic indicators rose 0.3% in January, topping forecasts.