Treasury debt prices rose Wednesday as recession fears and a bleak corporate profit outlook hurt the stock market and lifted demand for less-risky investments like government bonds.
Adding to a downbeat economic outlook was a resurgence in oil prices, which will exact a greater toll on consumers who are struggling with loan payments and a faltering job market.
"It take more money out of consumers' pockets. It's a drag on growth. More people are starting to think about a recession," said Michael Franzese, head of government trading at Standard Chartered in New York.
Meanwhile, bond price gains were curbed by a report the Federal Reserve is considering new measuresto resolve liquidity problems in the financial markets should steps taken so far fail to gain traction.
Another factor keeping a lid on bond prices was the news that Citigroup, the biggest US bank by assets, is close to a deal to sell about $12 billion of leveraged loans and bonds sell about $12 billion of leveraged loans and bonds in a bid to improve its balance sheet.
The Citigroup development initially boosted stocks but was overshadowed by government data showing a surprise 3.2 million barrel decline in crude inventory. Major stock indexes were down as much as 1 percent, as oil spiked up to more than $111 a barrelin reaction to the inventory data.
The benchmark 10-year Treasury note's price, which moves inversely to its yield, was up 22/32 for a yield of 3.48 percent, down from 3.56 percent late Tuesday.
A day after the release of the Fed's March policy minutes, two-year notes outperformed their longer-dated counterparts for a second day. They were up 8/32 in price for a yield of 1.76 percent, down from 1.89 percent late Tuesday.
The minutes of the Fed rate-setting meeting last month confirmed the market's view of a rapidly deteriorating economy and showed policy-makers were bracing for an economic contraction in the first half of the year.
Steepeners Back in Vogue
With a looming recession, curve-steepening trades were back in vogue among traders betting on more aggressive rate-cuts from the Fed and renewed deterioration in the global credit market, analysts said.
These trades widened the yield gap between U.S. two-year and 10-year Treasuries to 172 basis points.
Interest rate futures implied traders are placing a 46 percent chance the Fed will trim its federal funds target rate by 50 basis points to 1.75 percent at the end of the month.
While the yield curve between the 2-year and 10-year notes has steepened since Tuesday, overall it has flattened from last month's 200 basis point spread when investment bank Bear Stearns was at the brink of collapse.
"Given how much the curve had corrected recently, we could see more steepening," said John Canavan, market strategist at Stone & McCarthy Research Associates in Princeton, New Jersey.