The price of 10-year Treasury notes dipped Tuesday, erasing earlier gains, as reassuring comments from Fannie Mae sent the stock market higher and dimmed bonds' safe-haven appeal.
Company executives were cautiously optimistic that the worst of the credit market turmoil erupting from the real estate slump may have passed. That triggered a big rally in Fannie Mae shares and supported a wider advance in U.S. stocks.
Earlier, Fannie Mae announced its third straight quarterly loss, renewing worries about more problems in the credit and housing markets.
The benchmark 10-year note's price was down 2/32 at 96-29/32, well below its earlier high of 97-17/32. The 10-year yield, which moves inversely with the price, was 3.88 percent, up slightly from 3.87 percent late Monday.
Treasury prices were higher into the early afternoon Fannie Mae's earnings report renewed credit anxiety which weighed on stocks and raised the safe-haven appeal of bonds.
Other negative news, including Swiss bank UBS's plan to lay off 5,500and to sell billions of dollars of subprime mortgages at a steep discount, underscored the continuing fallout from the credit crunch on financial markets and the US economy, analysts said.
Fannie Mae, the biggest funding source for US mortgages, posted a net loss of $2.51 billion or $2.57 a share, in the first quarter. It forecast further falls in home prices and continued problems in the mortgage market.
Federal Reserve Chairman Ben Bernanke cited the fragile state of the housing market in a speech late Monday. He said still-strained mortgage markets were a threat to the economy and urged steps to prevent home foreclosures where possible.
"All this begins and ends with housing. Unfortunately, there is no end in sight," said Richard Iley, senior economist at BNP Paribas in New York. Iley forecast another 20 percent drop in home prices from current levels.
This downbeat view on housing and credit pushed the major stock indexes sharply lower at the opening, but the equities market pared its losses in part on reassuring comments from Fannie Mae executives during their conference calls with investors.
Bonds were also supported by surging oil prices which traders said will crimp consumer spending and slow overall economic growth. This may also pressure the Fed to keep easing interest rates to stimulate the economy.
"That's been part of the perfect storm that has battered the consumers this year," Iley said.
While surging energy costs are hurting consumers, they do have long-term inflation implications. "It's undoubtedly a concern for policy-makers," Iley said.
US crude futures traded well above $120 a barrel in early trading.
Credit jitters and swings in the stock and oil markets will drive bond prices the rest of the session given a lack of fresh top-tier economic data, although this week's $21 billion in Treasury debt supply, part of the government's quarterly refunding, will also have an impact, analysts said.
"This week's 10-year and 30-year supply is keeping a lid on the market," Cantor's Edmonds said.
The Treasury will sell $15 billion in 10-year notes on Wednesday and reopen a 30-year bond issue by another $6 billion on Thursday.
Two-year Treasury notes traded 2/32 higher in price for a yield of 2.36 percent from 2.42 percent late Monday.
Five-year Treasury notes traded 5/32 higher in price for a 3.13 percent yield, down from 3.16 percent late Monday, while the yield on the 30-year bond was unchanged from 4.61 percent late Monday.
US government debt prices rose Tuesday on renewed credit jitters spurred by a hefty quarterly loss at major mortgage financier Fannie Mae which weighed on stocks and raised bonds' safe-haven appeal.
Other negative news including planned 5,500 job cuts at Swiss bank UBSunderscored the continuing fallout from the credit crunch on financial markets and the economy, analysts said.
"This is just another example of why the US economy is likely to sputter for the rest of the year as it tries to regain its footing," said Kevin Giddis, managing director of fixed income trading at Morgan Keegan in Memphis, Tenn.