Published: Tuesday, 27 Oct 2009 | 2:11 PM ET

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U.S. Treasury debt prices rose Tuesday in bargain-hunting and following strong demand in an auction of two-year notes, part of this week's record $123 billion supply of government bonds.

Data showing a surprise decline in consumer confidence this month also revived worries over the pace of an economic rebound and further drove demand for bonds, causing benchmark yields, which move inversely to price, to retreat from two-month highs.

Treasurys extended gains Tuesday afternoon following robust demand in an auction of $44 billion of two-year notes.

"Very strong auction," said Ian Lyngen, senior government bond strategist with CRT Capital Group in Stamford, Conn., adding "since the results, Treasurys have rallied even further."

Benchmark 10-year notes were trading 21/32 higher in price to yield 3.48 percent, down from 3.55 percent late Monday, while 2-year notes were 4/32 higher to yield 0.96 percent from 1.03 percent.

Earlier in the day the Conference Board, a private research group, said its barometer on consumer confidence slipped to a reading of 47.7 from a revised 53.4 in September.

Bond Yields

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"This report reminds us that the economic recovery will be soggy at best unless the consumer starts to feel better and spend more," said Cary Leahey, an economist at Decision Economics in New York. "Bonds can rally on signs of softer news going into the fourth quarter."

A report showing U.S. home prices rose for a fourth straight month in August was brushed off, as analysts questioned whether the sector's recent improvement could continue without federal aid.

"With unemployment being so high, it's hard to see how this could be sustained," said Guy LeBas, fixed income strategist at Janney Montgomery Scott in Philadelphia.

The Standard & Poor's/Case Shiller composite index on home prices in 20 major U.S. cities rose 1.2 percent in August from July. Year-over-year, prices were down 11.3 percent.

The latest economic signals will also lessen the urgency for the Federal Reserve to raise benchmark interest rates in a bid to avert inflation.

Investors have been paring their Treasury holdings amid speculation the Fed is looking to move away from its ultra-loose monetary policy. Renewed worries over the long-term consequence of a mammoth federal debt load have exacerbated the selling in bonds, analysts said.

Those concerns could curb demand for the bonds that the U.S. Treasury plans to sell the rest of this week. In turn, Treasury yields could rise and ratchet up mortgage rates and other private borrowing costs, hurting rate-sensitive industries such as housing.

Treasury yields face added upward pressure from concerns over the government's surging borrowing to fund its stimulus and bailout programs and to make up for a shortfall in tax receipts due to the recession.

Tuesday's two-year note auction follows a strong $7 billion auction of five-year inflation-protected securities on Monday.

The Treasury will sell $41 billion of five-year debt Wednesday and $31 billion in seven-year notes Thursday.

Five-year Treasury notes were trading 13/32 higher in price to yield 2.40 percent, down from 2.49 percent late Monday, while 30-year bonds were 31/32 higher to yield 4.31 percent from 4.36 percent.

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