Treasury debt prices slipped Wednesday as a robust stock market rally tempered government debt's safe-haven appeal, reversing bonds' earlier gains on weak housing numbers and relatively modest inflation data.
Investors' shift into stocks and other riskier assets diminished some of the flight-to-quality trade that has stoked strong demand for Treasurys since the credit crisis erupted last August. But concern about short-term lending market stress helped curb Treasuries' losses, some said.
Major U.S. stock indices were up more than 1.5 percent in early-afternoon trade.
The benchmark 10-year Treasury note's price, which moves inversely to its yield, fell 4/32 for a yield of 3.62 percent, up from 3.61 percent late Tuesday.
"This leg up in equities above 1,350 for the S&P 500 has put some more pressure onto the Treasury market," said Carl Lantz, U.S. interest rate strategist at Credit Suisse in New York.
A move above that level puts the S&P 500 into the top half of the range it has held for about the last three months.
Earlier, data showed March housing starts fell more sharply than expected, re-igniting fears that the real estate market has further to fall before hitting bottom and sending investors into the safety of government bonds.
At the same time, data on core consumer prices -- which exclude volatile food and energy prices -- helped soothe concerns about the potential for surging commodity costs to stoke broader inflation, which erodes the value of bonds over time.
"Nominal Treasurys have had a little bit of a turnaround from a sell-off to a bit of a rally here because this is a relatively subdued report on the core side," said Mike Pond, Treasury and inflation-linked strategist with Barclays Capital in New York.
"The Fed don't appear concerned about the core (inflation rate) at this point because they expect slower growth to eventually bring inflation down," said Pond.
The 0.3 percent monthly rise in March headline consumer prices was less than the 0.4 percent gain that Wall Street economists had forecast in a Reuters poll, although the 4.0 percent year-over-year rate was in line with the consensus.
On Tuesday, a report showed the headline producer price number accelerated to a rapid 6.9 percent year-over-year pace in March. As one of the highest readings since the early 1980s, it stirred concern among bond market inflation vigilantes about a return of stagflation, a toxic mix of sluggish growth and surging inflation.
Pond questioned whether a slowing economy would counter price pressures. "We think inflation pressures in the United States are coming from strong global demand for food and energy."
Treasurys losses on Wednesday were capped by some concerns about strains in short-term lending markets, particularly in the most prominent benchmark for short-term borrowing, London Interbank Offered Rates, or Libor.
Matthew Moore, economic strategist with Banc of America Securities in New York cited "concerns about Libor ... and any time there are concerns about that rate, people tend to like Treasurys. It is an away-from-Libor trade."
Short-term interest rate futures showed about a 34 percent implied chance of a 50-basis-point rate cut at the Federal Reserve's policy meeting later this month, compared with about a 20 percent chance early on Wednesday. A shallower 25-basis-point cut is still priced in.
The two-year Treasury note's price was unchanged for a yield of 1.87 percent, compared with 1.88 percent late Tuesday.
The two-year note's yield has risen well above its multiyear low of 1.25 percent hit in mid-March because bond investors are now anticipating the end of the Fed rate-cutting cycle that started in September.