Treasury debt prices rose slightly Monday as a rebound on Wall Street was offset by expectations of aggressive interest rate cuts by the Federal Reserve and forecasts of a possible recession.
Trade was choppy with bonds bouncing back and forth on either side of unchanged through midday.
Bond prices initially rose and sent yields on two-year notes to three-year lows as most investors now expect the Fed to slash interest rates by a half a percentage point at a policy meeting at the end of the month in an effort to blunt an economic slowdown.
But higher-than-expected preliminary financial results from IBM fueled a technology sector-driven rise in stocks.
"It has been kind of an up and down morning," said Kim Rupert, managing director of global fixed income analysis at Action Economics in San Francisco, adding "after IBM pre-announced earnings, then Wall Street recovered and that has taken the bit of a bid out of Treasurys," she said.
Some investors bought bonds, however, in a continued search for lower-risk investments given speculation over the potential for economic recession this year.
"Since the beginning of January, recession fears have dominated, causing the (Treasury) curve to steepen and yields to fall," said Mustafa Chowdhury, head of U.S. rates research at Deutsche Bank Securities in New York.
Benchmark 10-year Treasury notes were trading 2/32 higher in price for a yield of 3.79 percent from 3.80 percent late Friday.
The 2-year Treasury note was trading 1/32 higher in price for a yield of 2.55 percent from 2.58 percent. The two-year yield reached to as low as 2.52 percent in early trade -- the lowest since late 2004. Bond yields move inversely to prices.
The slightly higher prices were driven by expectations that the Fed will aggressively cut interest rates to deal with an economic slowdown, and by growing expectations the economy may be headed into a recession.
"The Treasury 2-year note begins the week at a new cycle low in yields," said William O'Donnell, head of interest-rate strategy at UBS Securities in Stamford, Conn.
"As the gloom spread from housing to employment and consumption, the papers have become breathless over the looming recession threat in the U.S.," O'Donnell said.
But while the Fed is expected to react to a slower economy by cutting rates, a report in the Wall Street Journal on Monday said the central bank was unlikely to cut rates before its next scheduled meeting at the end of January.
While there was little economic data on the agenda on Monday, traders are looking for a relatively action-packed week, with December producer prices and retail sales Tuesday, along with consumer prices and industrial output Wednesday and December housing starts Thursday.
Also Thursday, Fed Chairman Ben Bernanke will testify on "the near-term outlook for the U.S. economy," although most investors expect him to reiterate the same message he gave last week -- that the Fed is prepared to cut rates aggressively in an effort to head off any further economic slowdown.
Five-year Treasury notes were trading flat in price for a yield of 3.04 percent, while 30-year bonds were 2/32 higher in price for a yield of 4.37 percent.