U.S. Treasury debt prices rose Tuesday after data showing slumping home prices and consumer confidence made it unlikely the Federal Reserve would dismiss growth concerns at its two-day policy meeting.
Bonds backed off their highs of the morning, however, as equities struggled into positive territory and sapped the safe-haven bid for government debt.
"This argues for a steady Fed policy -- the prospects for growth will make it difficult for the Fed to raise rates even in the face of surging commodity prices," said Dana Saporta, economist at Dresdner Kleinwort Securities in New York.
Benchmark 10-year Treasury notes were trading 6/32 higher in price for a yield of 4.14 percent from 4.17 percent late Monday, while two-year Treasury notes were 2/32 higher for a yield of 2.91 percent from 2.95 percent.
The vast majority of analysts expect the Fed to leave interest rates unchanged at the conclusion of their meeting on Wednesday. The accompanying policy statement, however, will be closely parsed for any clues on whether central bank officials are mulling an increase in rates later this year to combat inflation.
The Fed has lowered the recommended lending rate between banks at each of its last seven policy meetings -- from 5.25 percent to 2 percent -- citing a slowing housing market and flagging economic growth.
But with food and energy costs soaring, expectations have risen that price pressures will force the Fed to reverse course and begin tightening later this year.
The next highlight for the bond market is the auction of $30 billion of two-year Treasury notes Tuesday afternoon.
Traders often try to cheapen bond prices heading into such auctions.
Five-year Treasury notes were trading 6/32 higher in price for a yield of 3.59 percent from 3.63 percent late Monday while the 30-year bond was 8/32 higher for a yield of 4.69 percent from 4.70 percent.