Are Rates Going Higher or Lower?

U.S. Treasuriesprices fell on Tuesday after less worrisome data on European business activity in 10 months raised hopes of an economic recovery in the region, stoking selling of safe-haven government debt.

The market sell-off was also spurred by lower yields onItalian and Spanish sovereign debt after they jumped on Monday on worries about possible major political shake-ups in euro zone's third and fourth biggest economies.

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Another factor exacerbating the weakness in Treasuries prices was a revived reduction of long-dated hedges on debt securities known as power reverse dual currency notes.

Long-dated yields have risen recently as dealers have been unwinding hedges on these "exotic" products due to weakness in the Japanese yen against the dollar, traders and analysts said.

Bond bulls however, argue that the weakness in prices and gains in yield are only temporary.

They say the higher taxes will hurt consumer spending in the U.S. and that the growth outlook in the euro zone, already struggling under the weight of fiscal austerity, is worse than many investors expect.

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