Treasury debt prices rose after a Federal Reserve official's comments sparked renewed concern about the US economy and as investors plowed more cash back into the market from the quarterly refunding.
However, stocks' gains curbed the allure of safe- haven assets and capped Treasurys' advance, while key measures of investors' risk aversion ebbed.
Chicago Federal Reserve President Charles Evans said consumers were "under a lot of stress," underscoring the fragile state of the world's biggest economy.
In part, "I can attribute Treasurys' gains to Evans' comments that the consumer is having problems," said Mary Ann Hurley, senior Treasuries trader at brokerage D.A. Davidson in Seattle.
Investors' buying of Treasurys following the Treasury Department's quarterly refunding also stoked gains, analysts said.
The benchmark 10-year Treasury note's price, which moves inversely to its yield, rose 8/32 for a yield of 3.75 percent, versus 3.78 percent late Friday.
"The supply story has been very important," said Tony Crescenzi, chief bond market strategist with Miller, Tabak & Co. in New York. "Whenever the Treasury ends a refunding, the market tends to rally in the aftermath: 70 percent of the time, the Treasury market will tend to rally a week later," Crescenzi said.
The supportive effect of this cash being put to work in the government bond market masked the dwindling of a safe-haven bid for Treasurys driven by investors' concern about credit markets.
The spread of the 3-month dollar-denominated London interbank offered rates (Libor) over 3-month Treasury bill yields dipped below 100 basis points for the first time in nearly three months. The narrowing of that so-called "Ted spread" is a key indication that the flight into safe-haven instruments is abating.
Libor is a key global benchmark for inter-bank borrowing costs, which have shown high stress levels since global credit market turmoil erupted last summer.
"Credit market sentiment has improved," Crescenzi said. "There is no basis in the credit market story for buying in Treasurys today."
A record amount of more than $70 billion of interest payments associated with the quarterly refunding are flowing to investors, who are putting some of that money back to work in the market.
Treasurys remained within their recent ranges ahead of more Federal Reserve speakers this week and key economic reports on retail sales, inflation, housing and jobless claims.
"Right now we are in a holding pattern and trading off equities," said William Larkin, portfolio manager with Cabot Money Management in Salem, Mass.
"The oil situation is inflationary, but it is also an economic drag," Larkin said.
For now, prices of longer maturity fixed-income securities are weathering worries about inflation because of economic weakness, but Larkin warns that yields may spike over the next year or two if global food and energy prices stay high.
U.S. light, sweet crude oilretreated slightly from last week's record peak, but remained above $125 per barrel.
The 2-year Treasury note's yield, which responds closely to expectations for official interest-rate changes, traded within its past three-weeks' range between about 2.10 percent and 2.55 percent, above the 2 percent fed funds target rate, the key short-term lending rate set by the Federal Reserve.
The 2-year Treasury note's price, which moves inversely to its yield, was down 1/32 for a yield of 2.26 percent, versus 2.24 percent late Friday.
Fed Chairman Ben Bernanke is scheduled to speak Tuesday about the central bank's measures to aid the banking system's liquidity. Bond market participants also will listen closely for confirmation of the market's view that the Federal Reserve has now put its eight-month rate-cutting campaign on pause.
Some expect the central bank may be forced to start raising rates as soon as year end, under pressure from persistent inflation worries.