U.S. Treasury prices slipped Wednesday after service sector data showed more hiring and a spike in costs, both worrisome inflation omens for bonds.
But U.S. government bonds traded in quite narrow ranges as investors kept a wary eye on credit markets and as stocks steepened their decline late in the session.
A rebound in the Institute for Supply Management's jobs measure,which had turned negative for the first time in four years, sparked talk that Friday's pivotal monthly employment report could show a similar turnaround.
That might remove some of the impetus for the Federal Reserve to continue cutting benchmark U.S. interest rates.
"Treasury prices are lower because of uncertainty about what the Fed is going to do and there are mixed signals in the economy that we may be headed toward a stagnant economy with inflation," said Michael Yoshikami, President of YCMNET Advisors, in Walnut Creek, California, which manages over $900 million in assets.
The ISM services report component for prices paid was also troublesome to bondholders, surging to its highest since May.
Benchmark 10-year notes erased early gains to trade down 6/32 in price for a yield of 4.55 percent versus 4.53 percent late Tuesday. Bond yields and prices move inversely. The two-year note's price slipped 2/32 for a yield of 4.01 percent versus 3.98 percent late Tuesday.
As Wall Street stock indices extended losses in late afternoon trade, a modest safe haven bid helped put a floor under Treasury prices, some analysts said.
The Dow Jones industrial average fell about 0.5 percent to 13,972 points.
In riskier asset markets, "there are still underlying concerns out there that have kept Treasury yields from floating too high. With equities lower, I think that is giving bonds a little bit of a bid," said George Goncalves, chief Treasury/TIPS and agency strategist with Morgan Stanley in New York.
An earlier report on private payrolls from ADP Employer Services was inconclusive. The number came in right on expectations, showing a 58,000 gain, but also pointed to significant drops in construction and banking -- the two sectors hardest hit by the mortgage slump.
Separate numbers from Challenger showed a 10 percent decline in planned layoffs last month.
Taking a wider view, bonds were largely stuck in a range as investors flutter between dipping their toes back into riskier assets and worrying that it is too early to say the credit crisis has ended.
Companies are again able to raise capital through corporate bond issues, albeit at a premium. Yet some key gauges of capital availability, like the euro-denominated London Interbank Offer Rate, remain stubbornly high.
This suggests liquidity is still not what it once was, raising the risk of a prolonged squeeze on lending that could send an already faltering U.S. economy further into a rut.