U.S. government debt prices fell Tuesday after a modest uptick in consumer confidence and as falling oil boosted stocks, eroding Treasurys' safe-haven appeal.
Lower energy costs and the slightly less gloomy mood of consumers brightened the economic outlook and supported the view that the Federal Reserve might raise interest rates later this year to fight inflation, analysts said.
U.S. crude oil fell below $121 per barrel before settling at $122.19, promising to ease high gasoline costs for consumers somewhat. That helped to drive stocks higher and curb demand for bonds, said Ted Ake, executive director and head of bond trading with Mizuho Securities USA in New York.
"The current thinking is that if oil goes down, the stock market will go up, and therefore Treasuries will go down," Ake said.
"All three markets -- oil, stocks and Treasurys -- have been linked for the past few months, although it is not a perfect correlation," Ake said.
The price of the benchmark 10-year Treasury note, which moves inversely to its yield, fell 15/32 for a yield of 4.07 percent, compared with 4.01 percent late Monday.
Concerns about looming supply of bonds and the cost tied to the U.S. federal housing rescue package also reduced appetite for Treasuries, analysts said.
The Treasury Department sold $19 billion of one-year bills at a high rate of 2.29 percent.
The two-year Treasury note's price fell 4/32 for a yield of 2.65 percent, up from 2.59 percent late Monday.
Major U.S. stock indexes rose at least 2 percent on the drop in oil and the better-than-expected consumer confidence data.
World stock markets fell to two-week lows earlier after Merrill Lynch said late Monday it planned to write down another $5.7 billion on bad debt investments in the third quarter and to raise $8.55 billion in new stock sales. But European shares later reversed losses.
Economy Still at Risk
Yet by and large, the U.S economic picture remains quite gloomy and a resurgence of fears about the banking sector could revive demand for Treasuries at any time, strategists cautioned.
"We haven't dodged the bullet on recession," said Robert Brusca, chief economist at Fact and Opinion Economics in New York.
The Conference Board said on Tuesday its monthly gauge on consumer confidence, which is seen as a predictor of consumer spending, edged up to 51.9 in July from a 16-year low.
Despite the unexpected uptick in consumer confidence, the Merrill write-down announcement and news of a further slide in home prices suggested the U.S. economy remains fragile.
Standard & Poor's/Case-Shiller said its home price index on 20 U.S. metro areas fell 0.9 percent in May from April. This brought the year-over-year decline to a record 15.8 percent from May 2007.
"The housing data is clearly a lagging indicator. Although Case-Shiller is a startling headline, it is absolutely baked into the market," said Lawrence Glazer, managing partner of Mayflower Advisors in Boston.
The 30-year Treasury bond traded down 20/32 in price for a yield of 4.65 percent, up from 4.61 percent late Monday.