Treasury prices turned higher Wednesday, bolstered by surprisingly strong investor demand in a government sale of $18 billion in new 2-year Treasurys.
The Treasury auction attracted solid demand from foreign bidders, easing concerns that foreign central banks may be backing away from Treasurys in a search for more lucrative yields. The note sale also attracted a high level of bids from U.S. investors.
The benchmark 10-year Treasury note was up 2/32 at 101 with a 4.62 percent yield, down from 4.64 percent at Tuesday's close. Prices and yields move in opposite directions.
The 30-year long bond rose 6/32 to 101 22/32 with a 4.89 percent yield, little changed from late Tuesday.
The 2-year note advanced 1/32 to 100 1/32 with a 3.97 percent yield, down slightly from 3.99 percent on Tuesday.
Earlier, Treasury prices were under pressure after the Commerce Department reported that orders for durable goods dropped 4.9 percent in August contrasting unfavorably with a 6.1 percent gain in July and marking the largest decline since January. Much of the weakness was linked to lower bookings for the volatile aircraft industry.
The fact that businesses are not ordering as much capital equipment raises the possibility that capital spending may not be brisk enough to offset weakness in housing, consumer spending and other economic sectors.
Still, Ian Shepherdson, chief U.S. economist at High Frequency Economics, warned against reading too much into the latest report.
"The aircraft drop was well-flagged by data from Boeing, whose monthly orders numbers are hugely volatile," he said. "The underlying trend remains very strong."
Often the fixed-income market draws strength from signs of economic softness, because they make low-risk assets more attractive.
However, in the wake of Federal Reserve's half percentage-point rate cut last week, the bond market is more worried that the Fed will keep dropping rates and set off higher inflation.
The fixed-income market is ambivalent about lower rates, which spur higher prices and unleash inflationary forces that eat away at the value of bonds. At the same time, the latest Fed rate reduction has brought healthy capital flows back to the capital markets, after a nearly moribund August.
The Treasury market in general also has been trading in reverse to the stock market since last summer. On Wednesday, stocks were supported by relief that General Motors and its workers reached a tentative agreement that will halt a two-day strike.
In addition, the Treasury market is keeping close tabs on currencies, after the dollar skidded to fresh record lows against the euro overnight. Last week, the dollar reached parity with its Canadian counterpart for the first time in decades.
A number of recent rallies in the Treasury market have pushed yields lower, coinciding with the drop in the Federal funds rate. These events have diminished the dollar's appeal in relation to other currencies.
At the same time, there are concerns in the credit markets that a drooping dollar will prompt foreign investors to sell their Treasury notes and load up on assets denominated in the euro and other currencies.