Treasury debt prices fell Thursday, as traders favored stocks over bonds on upbeat earnings outlook that overshadowed data supporting the grim view on the economy.
Wal-Mart's higher forecast suggested that the crucial consumer sector, which accounts for more than two-thirds of the economy, is not in free-fall even as consumers struggle with heavy debt loads, record gasoline prices and a swooning job market.
Also on Thursday, J.P. Morgan Securities raised its profit forecast on tech bellwether Apple, saying stronger-than-expected MacBook shipments will offset softer iPhone and iPod sales.
Some analysts now believe that if a recession does occur, it will not be a deep and long as some has feared, which would be positive for corporate earnings and stocks. That view limited the safe-haven appeal of bonds Thursday.
"It's a reassessment in the values of rates and bonds versus other risk assets, notably stocks," said George Goncalves, chief agency, TIPS and Treasury strategist at Morgan Stanley in New York.
Major stock indexes were up as much as 1.5 percent.
Bond prices initially rose after government figures showing an unexpectedly wider trade deficit and a rise in a benchmark figure jobless claims confirmed the notion the United States is slipping into recession and will spur the Federal Reserve to trim interest rates further to prevent a prolonged economic contraction.
"It suggests the economy remains under stress, so they're (Fed policy-makers) still going to be working on reviving the growth side," said Gregory Miller, chief economist at SunTrust Banks in Atlanta.
Traders are placing a 44 percent chance the Fed will lower short-term rates by a half percentage point to 1.75 percent at the end of April, based on federal funds futures.
The price gains in bonds, which some consider pricey, have been curbed by profit-taking, analysts said.
The benchmark 10-year Treasury note's price, which moves inversely to its yield, was down 10/32 for a yield of 3.52 percent, versus 3.48 percent late Wednesday.
Two-year notes still outperformed longer-dated paper for a third day, was trading down 1/32 for a yield of 1.79 percent, up from 1.77 percent late Wednesday.
Meanwhile, the Treasury Department will sell $6 billion in 10-year inflation-protection securities (TIPS) in a reopening of a prior issue sold earlier this year.