U.S. Treasurys prices slipped on Monday after Spain sought help for its banks and data showed the pace of Chinese manufacturing quickened, damping demand for safe-haven U.S. debt.
The market's losses were limited, though, by bumpy debt talks between Greece and its lenders, worries about budget talks in Washington, and an Institute for Supply Management (ISM) survey showing U.S. manufacturing contracted in November.
"The thing to watch is employment, which was below 50 for the first time in 38 months,'' said Bradley Holcomb, chairman of the ISM manufacturing business survey committee. A reading below 50 points to contraction.
"That, along with inventories being down 5 percentage points, are signs that businesses are pulling back and not spending money on employees or inventories," he said.
The news on Spain damped the bid for safe-haven U.S. government debt, as did the data showing revived growth in China, said Jason Rogan, director of Treasurys trading at Guggenheim Partners in New York.
But the bond market was "fatigued" and didn't muster a lot of buying forces on the bond-friendly ISM data, he said.
Benchmark 10-year Treasury notes were down 2/32 in late afternoon trade, their yields edging up to 1.63 percent from 1.62 percent late on Friday. The 10-year yield flirted with its 100-day moving average of 1.6519 percent earlier following an 8 basis-point decline last week, according to Reuters data.
The market seemed to have given up responding to every utterance from Washington on the potential year-end fiscal crisis known as the fiscal cliff. Broad-based tax increases and spending cuts could automatically take effect after Dec. 31 if no other agreement is reached before then.
"We're trying not to get caught up in every statement," said Steve Van Order, fixed-income strategist at Bethesda, Md.-based Calvert Investments with $12 billion in assets under management.
"We've looked at it. We know the different scenarios. We have our view in place in terms of what we are doing with our portfolios."
Van Order said market volatility was pretty low.
"The yield ranges we've had since August have held pretty well," he said "The Treasury auctions last week went great."
Investors have absorbed debt issued by corporations as well\ as the debt sold by the U.S. government.
The U.S. high-grade market began what could be another record-breaking month on Monday with December volume expected to be in the $50 billion area, according to IFR, a Thomson Reuters unit. The record for December was $51.04 billion in 2007.
"Ever since (President Barack) Obama got re-elected, people expect near zero short-term interest rates and are reaching for spread," Van Order said. "Corporations had massive, record November issuance and that got absorbed pretty well."
Early selling in Treasurys stemmed from data showing Chinese manufacturing returned to growth in November for the first time in over a year.
Bonds' widened losses on news that Spain formally requested the disbursement of 39.5 billion euros ($51.4 billion) of European funds to recapitalize its banking sector.
U.S. Treasury Yields
U.S. bond prices have moved in a tight range since the U.S. presidential election nearly a month ago on the likelihood of a contentious process between President Barack Obama and Republican lawmakers to avoid the "fiscal cliff."
The absence of a budget deal before year-end would cause a fiscal contraction -- a series of automatic tax hikes and spending cuts worth $600 billion -- austerity that could tip the U.S. economy into a recession.
U.S. business executives have cut spending and hiring on possible fallout from a failure to reach agreement.
Tepid growth and high unemployment will likely cause the Federal Reserve to stick with its ultra-loose monetary policy.
The U.S. central bank is widely expected to decide at its policy meeting next week that it will continue to buy longer-dated government debt in 2013 in an effort to hold down mortgage rates and other long-term borrowing costs to support the economy. Its "Operation Twist" program, which involves selling short-dated Treasurys and buying $45 billion a month in longer-dated issues, will expire at the end of the month.
St. Louis Fed President James Bullard told the Wall Street Journal on Monday that the Fed could replace "Twist" with a smaller $25 billion per month outright purchases in Treasurys.
The Fed sold $7.828 billion in short-dated issues for Operation Twist after buying $16.8 billion in long-dated debt last week.
In November, Treasurys earned a middling 0.52 percent return, lagging junk and municipal bonds, according to Barclays.