U.S. Treasurys fell Wednesday in choppy, post-Christmas trading with benchmark yields at their highest levels since mid-November, prompted by a recovery in stocks and a poor two-year note auction.
The resurgence in oil priceswas also negative for bonds.
Oil climbed almost $2 to nearly $96 a barrel, feeding inflationary pressures and curbing expectations of the Federal Reserve slashing interest rates to counter the housing slump.
The below-average bidding for $22 billion in 2-year debt, the largest December offering since 2004, was not entirely unexpected in light of skeletal staffing at many U.S. trading desks the day after Christmas.
"Today is more a mode of holiday trading. There is also tepid demand on two-year notes,'' said George Adell, fixed-income strategist at Commerce Capital Markets in Jupiter, Fla., said of the factors pushing down bond prices.
Treasury trading volume was running at less than half its recent average, according to bond broker ICAP.
The latest two-year auction results fell far short of their recent readings, foreshadowing possible lackluster demand for Thursday's $13 billion of new five-year Treasury notes.
"You will have the Street trying to push up the yield as high as possible,'' Adell said.
Meanwhile, safe-haven buying of Treasurys also receded as stocks recovered from earlier lows, led by the Nasdaq's gains.
Treasury prices posted session lows after the two-year note auction. Two-year Treasury notes were down 4/32 in price with their yields rising to 3.32 percent, up from 3.25 percent late Monday. Bond prices and yields move inversely.
The benchmark 10-year U.S. Treasury note's price was down 20/32, erasing an 8/32 gain shortly before the auction. Its yield was 4.30 percent, the highest since Nov. 14, up from 4.21 percent late Monday.
Among other maturities, five-year notes were down 11/32 to yield 3.73 percent, up from 3.64 percent late Monday, and the long bond was off 1 full point for a yield of 4.69 percent versus 4.62 percent late Monday.
The U.S. bond market was closed Tuesday for Christmas.
Many European and some Asian markets stayed shut Wednesday.
On the data front, several reports suggested the housing slump was far from over and mixed Christmas results from retailers, portending a rocky economy in the coming months.
The Standard & Poor's/Case-Shiller said Wednesday its index of home prices in 10 metropolitan areas fell 6.7 percent in October, its biggest-ever annual drop.
Readings on retailers' holiday sales, not as weak as some had feared, were far from robust. Domestic chain-store sales grew 1.0 percent to 3.0 percent last week against the comparable week in 2006, according to the separate reports from Redbook Research and International Council of Shopping Centers/UBS released Wednesday.
Moreover, the Richmond Fed's factory activity index weakened to minus 4 in December, suggesting contraction in the region's manufacturing sector.