U.S. Treasury debt prices inched down Monday as a higher-than-expected core inflation reading and the prospect of more supply made investors cautious.
Bond traders also braced for the Federal Reserve's policy-setting meeting on Tuesday.
The benchmark 10-year Treasury note's yield remained below 4 percent and near two-week lows, on the impression of U.S. economic fragility underscored by Friday's weak U.S. jobs report.
The benchmark 10-year Treasury note's price, which moves inversely to its yield, was down 1/32 for a yield of 3.95 percent, versus 3.94 percent late Friday.
Among the personal income, consumption and prices data released Monday, "the focus seems to be on the inflation side (of the data), which was firm," said Josh Stiles, bond strategist and managing director with IDEAglobal in New York.
The prospect of this week's issuance also capped U.S. government bond prices, traders said, with the Treasury Department planning to sell $17 billion of 10-year notes and $10 billion of 30-year bonds later this week.
"The Treasury market right now is going to be driven by people involved in the auctions looking for an excuse to cheapen things up," Stiles said.
The U.S. core PCE price index for June rose 0.3 percent, above economists' forecast for a gain of 0.2 percent. The core year-over-year rate was 2.3 percent, above the Federal Reserve's presumed comfort zone. Headline PCE inflation was running at 4.1 percent year-over-year. During recent months as food and energy costs have stayed high, the U.S. central bank has increasingly focused on headline measures of inflation.
"There is a general realization that this downturn in economic growth has spread to other countries" beyond the United States, said Joseph DiCenso, fixed-income strategist with Lehman Brothers in New York.
The Federal Reserve's policy-setting meeting is Tuesday, with few expecting any shift in the fed funds target rate from the current 2 percent.
"Nobody expects anything grand from the Federal Open Market Committee, so I think this week will be supply dominated," said William O'Donnell, head of U.S. interest-rate strategy and research with UBS in Stamford, Conn.
"This constant drone of relatively weak economic data both here and abroad as well as the continued stress in the banking system are all apparently putting a floor underneath (Treasury) prices here despite the supply," O'Donnell added.
The Dow Jones industrial average fell 0.4 percent to 11,282.92 in late morning trading. The Nasdaq Composite Index was down 0.8 percent at 2,293.42 and the broad Standard & Poor's 500 Index was down 0.6 percent at 1,252.98.
The two-year Treasury note's price was unchanged in price at 100-16/32 for a yield of 2.51 percent, as U.S. stocks sold off, weighed by weakness in the financial sector.
The 30-year Treasury bond dipped 1/32 in price for a yield of 4.57 percent, steady with late Friday.
The stock market's decline helped to revive bids for safer assets such as U.S. government bonds, which rose slightly earlier in the session.