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Treasurys pare losses as stocks extend tumble

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U.S. bonds turned higher on Tuesday as energy shares lead a sharp stock market selloff.

Yields on the benchmark 10-year note topped 2.50 percent after the Institute for Supply Management said its services index rose to 58.7 last month, the highest since December 2005, from 56.0 in June. The reading blew past economists' forecasts of a 56.3 reading, according to a Reuters survey.

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The report further encouraged speculation that Federal Reserve may start hiking interest rates sooner than expected.

Benchmark 10-year Treasury notes—whose yields are used to calculate mortgage rates and other consumer loans—turned positive, bringing the yield down modestly to 2.48 percent.

The 30-year bond also turned positive, with the yield at 3.28 percent, up 7/32 in price.

Earlier, Treasury yields were lifted as investors unwinding defensive holdings amid stock market gains on Wall Street on Monday and in Europe on Tuesday.

"It's a reaction to how stock markets are doing a little better; they have stabilized a bit," said Steve Van Order, fixed income strategist with Calvert Investments in Bethesda, Maryland. "That flight to quality is getting unwound down the curve."

Earlier on Tuesday, however, U.S. stock markets were lower even after European equities rose on better-than-forecast company results.

Among intermediate maturities, the seven-year note yields were flat at 2.14 percent, while five-year note yields hoovered around 1.66 percent, slightly higher on the day.

Yield differences between 2-year and 30-year Treasurys have been shrinking, with some demand shifting away from the long bond to 2-year and other shorter and intermediate maturities, Van Order said. "We will continue to see pressure on the shorter maturities," Van Order said. "We think there will be some pushing and shoving in that part of the curve as the months go by to when the Fed moves to liftoff.''

—By Reuters