Treasury debt prices rose Monday in light trading as investors pushed yields lower ahead of an expected interest rate cut from the Federal Reserve this week.
Investors also moved to take back some of Friday's sharp losses that some felt were an overreaction to overseas inflation data. Higher-than-expected Japanese inflation hit Japanese and euro-zone government bonds sharply, and moved on to undercut US government debt prices.
"The Friday morning sell-off was an overshoot in reaction to the meltdown in Tokyo," said Richard Gilhooly, senior US bond strategist at BNP Paribas in New York. "You are also getting some (Treasury) curve flattening."
The Treasury curve steepened Monday, with the spread between 2-year notes and 10-year notes widening to 147 basis points from 144 basis points late Friday.
The Treasury curve has recently been flattening, with the spread between shorter-dated debt and stronger-dated debt narrowing. Investors Monday were moving to unwind that recent flattening trade, in part because many expect the Federal Reserve may not aggressively cut interest rates much further.
The benchmark 10-year Treasury note was trading 5/32 higher in price for a yield of 3.85 percent from 3.87 percent late Friday, while the two-year note was up 3/32 for a yield of 2.38 percent, down from 2.43 percent.
Trade volume was below-average as investors looked ahead to what is expected to be a very busy week, with the Fed wrapping up a two-day policy meeting Wednesday, and the government set to release nonfarm payrolls data for April on Friday.
"We are entering a huge week of data and events -- a week that is almost certain to shape the trading pattern of the Treasury market for weeks to come," said William O'Donnell, head of US interest rate strategy at UBS Securities in Stamford, Conn.
Investors have pared bets that the Fed will aggressively cut benchmark interest rates. Fed funds futures indicate an 82 percent implied chance of a quarter percentage-point cut in the recommended overnight lending rate between banks when the Fed concludes its meeting.
Over a week ago, a significant number of investors were calling for the Fed to cut by half a point.
The Fed has aggressively cut the benchmark rate in an effort to breath life into a flagging economy, taking the federal funds rate from 5.25 percent in September to the current 2.25 percent.
Worries over rising inflation, due in large part to soaring energy costs, have some investors thinking the Fed may signal Wednesday that it could be done cutting rates for now.
Later in the week, Friday's payrolls data is expected to give insight into how badly the economy is faring. If employers shed jobs in April it would be the fourth straight month of declines, which could confirm for many that the economy is gripped by a recession.
The median of forecasts from economists polled by Reuters is for nonfarm payrolls to slip 80,000, matching March's fall.
In the interim, 5-year Treasury notes were trading 4/32 higher in price for a yield of 3.15 percent from 3.18 percent late Friday, while 30-year bonds were 4/32 higher for a yield of 4.59 percent from 4.60 percent.