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U.S. Treasurys pared much of their early losses Monday after fears about bank profits offset stronger-than-expected data on manufacturing, construction and home sales.
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An initial negative market reaction to the stronger-than-expected economic data was short-lived because investors are looking ahead to other key data due this week and to what the Federal Reserve will say Wednesday at the conclusion of the Federal Open Market Committee's two-day monetary policy meeting.
Treasurys also were pressured by early stock gains that sapped the safe-haven bid, but stocks turned flat to slightly negative in afternoon trading, sending investors back to US government debt.
The benchmark U.S. 10-year note, down 7/32 in early dealings, was off 4/32 and yielded 3.40 percent, up a tick from from 3.39 percent Friday.
The 30-year bond , briefly down a full point, was off 8/32 just before midday, its yield at 4.24 percent, up from 4.23 percent Friday.
"Prices initially fell on the stronger-than-expected ISM construction and pending sales figures but quickly rebounded," Canavan said.
He said the market was focused on economic data yet to come this week, including non-farm payrolls on Friday, and details of the Treasury's fourth-quarter refinancing, to be announced later on Monday, and on the Fed's policy meeting.
Fed Statement Key
Market analysts will put the Fed statement under a microscope Wednesday.
At issue is whether more hawkish members of the Federal Open Market Committee, the Fed's policy arm, will manage to make the Fed statement slightly less dovish by removing the word "extended" from the Fed's current commitment to keep interest rates low for an extended period.
The Fed's support for the economy through the crisis—by cutting benchmark rates to near zero and expanding its balance sheet through lending and asset purchases—has caused some policymakers to worry that inflation might come back when a recovery finally takes hold.
Others, such as Fed Vice Chairman Donald Kohn, maintain that with unemployment likely to go above 10 percent and many U.S. factories idle, the greatest risk to the outlook is a loss of momentum, not inflation.
The Fed's statement could retain the "extended period" phrase or go back to the language it had earlier in January, which was just to keep rates low without specifying for an extended period, analysts said.
In the latter case, they said, the Fed would try to emphasize that removing the word "extended" did not imply a rate hike at the December meeting or any time soon.
Two-year notes, which tend to be sensitive to prospective changes in Fed policy, were off 1/32, their yields rising to 0.91 percent from 0.90 percent late Friday.
Economic Outlook
The market is trying to assess the prospective character of the economic recovery. On Monday, the data appeared to point toward a healthy one.
The good news on the economy included the Institute for Supply Management's factory index, which showed U.S. manufacturing grew for the third straight month.
The National Association of Realtors said pending sales of previously owned U.S. homes unexpectedly rose in September to the highest level in nearly three years.
U.S. construction spending made its largest gain in a year in September, aided by a big rise in private residential building and a record pace of public construction, the government said.
"Time will tell whether we will have a V-shaped recovery or not, but the data today do tend to rule out a W-shaped recovery or new recession," said Chris Rupkey, chief financial economist at Bank of Tokyo-Mitsubishi UFJ in New York.
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Data is a real-time snapshot *Data is delayed at least 15 minutes