Treasury debt prices pared some gains Tuesday, losing some of their safe haven allure, as U.S. stocks rebounded, traders said, amid a recovery of financial shares and as the crude oil price slid.
The benchmark 10-year Treasury note's price, which moves inversely to its yield, traded up 10/32 for a yield of 3.82 percent, versus 3.86 percent late Monday.
Treasurys earlier hit session highs as comments from Federal Reserve Chairman Ben Bernanke's congressional testimony sparked fresh losses in the stock market and more demand for safe-haven government debt.
Bernanke said restoring financial market stability is a top priority for the U.S. central bank as a weakening housing market, tighter credit and rising oil prices threaten the economy. He said financial markets and institutions remain under "considerable stress."
Two-year notes were up 9/32 after being up 5/32 before the testimony. Their yields eased to 2.33 percent from 2.39 percent just before 10 a.m. Tuesday and 2.47 percent late Monday.
Treasury prices initially rose on safe-haven demand as stocks prices tumbled and as a weak banking sector cut expectations that the Federal Reserve will raise interest rates any time soon.
As major stock market indexes fell in early trade, U.S. short-term interest rate futures cut back on implied prospects for Fed rate hikes over the next several months. Prospects for a rate hike by year-end fell to 82 percent after being almost fully priced on Monday.
Traders Ben Bernanke's semiannual monetary policy testimony before the Senate Banking Committee at 10 a.m. would get a lot of attention.
The bid for safe-haven U.S. government debt was also fed by General Motors'announcement that it would cut employment, sell assets and borrow at least $2 billion to bolster liquidity in the face of plummeting sales.
In addition, many financial issues again fell sharply when the stock market opened.
Government-sponsored mortgage giants Fannie MaeandFreddie Macwere down 19 percent and 26 percent, respectively. Citigroupand Bank of Americawere each down just over 4 percent, but Lehman Brothers Holdings and Washington Mutualregained some recent sharp losses.
Economists said June data on inflation and retail sales released on Tuesday offered fresh signs of stagflation in the economy. Government bonds generally benefited from these signs of economic weakness, although inflation is a negative for bonds, particularly those that don't mature for many years.
Total sales at U.S. retailers rose a less-than-expected 0.1 percent in June, as auto sales posted their biggest drop in more than two years, a Commerce Department report showed.
"The beginning of the quarter looked better than the end. People have been diverting a lot of their spending power to buying gasoline," said Pierre Ellis, senior economist at Decision Economics in New York.
The Labor Department said producer prices over the last 12 months were up 9.2 percent, the biggest increase since a 10.4 percent gain in June 1981 when the United States was last mired in a low-growth, high-inflation period known as stagflation.
A regional manufacturing survey showed factory activity in New York contracted for the fifth time in six months and data in the report suggested producers were passing on higher prices to consumers, which could add further fuel to inflation.
Benchmark 10-year Treasury notes traded 9/32 higher in price while their yields, which move inversely to prices, slipped to 3.83 percent from 3.86 percent Monday.
Two-year notes rose 5/32 for a yield of 2.39 percent, versus 2.47 percent late Monday.