US short maturity Treasury debt prices extended losses, after the Federal Reserve cut interest rates by 75 basis points in the face of credit market turmoil and a deteriorating economy.
That reduction was less steep than the 100-basis-point cut some market participants had expected.
The 2-year Treasury note's price traded down 11/32 for a yield of 1.52 percent, versus 1.49 percent shortly before the rate decision and versus 1.35 percent late Monday.
Treasury debt prices fell earlier as unexpectedly strong bank earnings ignited a stock market rally and eroded the safe-harbor appeal of government debt.
In the aftermath of the Fed's help to credit markets and JPMorgan Chase's agreement to buy ailing investment bank Bear Stearns, Treasury yields fell near five-year lows Monday, but rebounded Tuesday as the intensity of investors' fears about credit markets abated somewhat.
"The investment bank earnings were better than expected. CDS (credit default swap) spreads have tightened and stocks were up a lot. That is weighing on the Treasury market," said Josh Stiles, bond strategist and managing director with IDEAglobal in New York.
The benchmark 10-year Treasury note's price, which moves inversely to its yield, fell 32/32 for a yield of 3.42 percent, versus 3.30 percent late Monday.
The stock market pared some losses following the Fed announcement, but the Dow was still up 2.2 percent to 12,235.13 by 2:30 pm.
"If the stock market can find a footing, we should see some sort of a bottom in Treasury yields," said Carley Garner, senior analyst with Alaron in Las Vegas.
However, Stiles said: "I don't think the data is a big market mover. The PPI core is more elevated than expected, but the year-on-year trend is not going to be too alarming yet. Regarding the housing starts, I wouldn't put anything in that little bounce, The housing industry is in a recession."
The Fed is widely expected to cut rates at its policy meeting in its latest bid to restore confidence in an economy many analysts say is already in recession and help get liquidity flowing through gummed-up financial markets.
The rate cut will be the latest in a series of moves in recent months that have included emergency rate cuts, massive liquidity injections into the banking system and increased loans to banks.
"Some of the selling pressure in Treasurys is position-squaring ahead of the Fed," said Garner. "The market has already really priced in the rate cut."