U.S. government bond prices fell for a second day Wednesday as traders locked in profits from a rally fueled by speculation that the Federal Reserve could opt for a half-point interest-rate cut next week.
But analysts described the selling as moderate, an indication that the market was not ready for a correction and yields stayed near their 19-month lows.
A choppy stock market didn't influence Treasuries much, although bond prices tended to trim losses when equities slipped into negative terrain.
"The market's already priced in probably a 50-basis-point cut at the next meeting. At this point, it's a lot of the speculative buyers taking profits and just looking forward to the meeting," said Carley Garner, an analyst at Alaron Trading in Chicago.
The Federal Open Market Committee will meet on Tuesday.
Speculation of a reducation of half a percentage point in the fed funds rate target to 4.75 percent was fanned by an unexpected drop in August's nonfarm payrolls, which suggested some stress in the labor market.
Benchmark 10-year notes traded down 8/32 in price for a yield of 4.40 percent, versus 4.37 percent late on Tuesday. Yields have risen from 4.30 percent touched on Monday, which was the lowest level since early 2006.
"There isn't a lot of follow-through selling, which tells me that it's not quite ready for a correction," Garner said.
Some investors were pocketing profits as they doubted that the Fed would go for a 50-basis-point cut for fear of stoking inflationary pressures, traders said.
"There is a greater risk of inflation down the road. When you look at the economy, the dollar, gold and oil prices, you have to wonder how much forward looking must take place before inflation becomes a problem," said Kevin Giddis, head of fixed income at Morgan Keegan in Memphis, Tenn.
Crude oil prices jumped to a record high of $80 per barrel on Wednesday, while the dollar tumbled to an all-time low against the euro.
Traders also attributed the negative tone in the bond market to so-called rate-lock selling, as some sold to fix rates in strategies related to corporate bond deals.
"The long end is under-performing. There is a large CMBS issue scheduled to price later today, so you might be seeing some rate locks going into that issuance being initiated," said Marty Mitchell, head of government bond trading at Stifel Nicolaus in Baltimore.
Issuers of corporate bonds usually lock in interest rates ahead of a deal by selling Treasurys, pushing down their prices.
German state bank KfW issued a $4 billion two-year bond and Federal Farm Credit Banks Funding said it had sold $1.225 billion of new five-year designated bonds. Schering-Plough has proposed a $1.5 billion debt offering.
The 30-year bond fell 13/32 in price to yield 4.68 percent, versus 4.66 percent late on Tuesday.
Five-year notes slipped 4/32 in price for a yield of 4.10 percent, up from 4.07 percent the previous day.
Issuance activity saw a contraction in U.S. interest-rate swap spreads. Ten-year swap spreads narrowed to 65.50 basis points, versus 66.25 basis points late on Tuesday. Two-year spreads fell to 77.25 basis points from 77.75 basis points previously.