Treasury debt prices rose as data showing slumping home prices and dismal consumer confidence reinforced the idea that the economy is still struggling and supported a safety bid for bonds.
Investors worried about further signs of a weakening economy turned from riskier assets like stocks and bought bonds as a safe-haven investment the day before an expected Federal Reserve interest rate cut.
"In the data today you couldn't really ask for much worse--this economy is looking very, very weak," said Dominic Konstam, head of interest rate strategy at Credit Suisse in New York.
The benchmark 10-year Treasury note rose 14/32 higher in price for a yield of 3.78 percent from 3.83 percent late Monday, while the two-year note was trading 3/32 higher in price for a yield of 2.30 percent from 2.36 percent.
The Fed begins a two-day policy meeting on Tuesdayand is widely expected on Wednesday to cut its benchmark overnight rate by 25 basis points to 2.00 percent after having already cut it six times since September to stimulate the economy.
Treasury prices this week have gained on the view that the Fed may extend its rate-cutting campaign in coming months.
"People are now beginning to come around to the idea that the Fed may be pausing, but it will be a soft pause whereby they are not going to rule out further cutting," Konstam said.
For the past several weeks, bond prices had generally been falling, and yields rising, with some investors speculating that the worst of a global credit crisis may be over and that the Fed may be mulling a pause in monetary loosening after one more rate cut on Wednesday.
"Some of the higher yields of late have presented a buying opportunity to those who think the credit crisis is not over and that the economy is in recession," said Kim Rupert, managing director of global fixed-income analysis at Action Economics in San Francisco.
The Fed decision Wednesday is not the only significant information that bond investors are waiting for this week.
On Wednesday the government will release its second estimate of second quarter economic growth, to be followed by the March personal consumption expenditures (PCE) index Thursday and April non-farm payrolls Friday.
The PCE could give some indications as to the pace of inflation, while the gross domestic product and payrolls data could indicate whether the economy is firmly stuck in recessionary mode.
Soaring energy and food costs have been fueling inflation fears, which in turn has had investors speculating the Fed may be left with little room to continue loosening monetary policy to boost the struggling economy.
Five-year Treasury notes were trading 8/32 higher in price for a yield of 3.07 percent from 3.12 percent late Monday, while the 30-year bond was 27/32 higher for a yield of 4.51 percent from 4.57 percent.