Treasury bond prices slid after billionaire investor Warren Buffett offered to take over some liabilities of bond insurers, easing a critical concern that has inspired flight-to-safety bond purchases.
A rebound in stocks dealt another blow to the safe haven allure of government issues, adding to their losses.
Buffett told CNBC television that Berkshire Hathaway's plan would cover $800 billion in municipal bonds. The remarks curbed the risk aversion bid that has stoked a U.S. government bond market rally for much of the past seven months.
The benchmark 10-year note's price, which moves inversely to its yield, fell 25/32 for a yield of 3.71 percent, compared with 3.62 percent late Monday.
"The Buffett news subsequently led to the equity rally and compounded the problem for Treasury bonds," said Don Kowalchik, a debt strategist at A.G. Edwards & Sons in St. Louis. "The flight-to-quality bid is being sucked out of the market," Kowalchik added.
"(Equity) investors are taking this (Buffett plan) extremely positively, that this would be a boon for the bond insurers and that we are now avoiding the doomsday scenario, so there has been a Treasury market sell-off," said T.J. Marta, fixed income strategist with Royal Bank of Canada Capital Markets in New York.
Further eroding Treasurys' appeal, stocks surged, with the Dow Jones industrial average rising 1.8 percent to 12,462 points. Treasurys are often seen as a comparatively stable refuge to park funds when stocks tumble, while climbing equities tend to draw flows out of Treasurys.
Analysts said the Buffett plan may ease fears of an intense credit market sell-off centered on municipal bonds. Bond insurers have been threatened by a loss of their top credit ratings after insuring billions of dollars of risky subprime debt in addition to the traditional business of guaranteeing municipal bonds.
The two-year note, which responds closely to expectations for central bank interest rate moves, traded down 6/32 in price for a yield of 2.01 percent, versus 1.91 percent late Monday.
The two-year yield is nearly 100 basis points below the benchmark overnight lending rate the Federal Reserve sets, which has led some analysts to question whether short-dated note yields can fall much over the near term.
"The bond market has reached sort of a bottom in yields. Investors are a little bit frustrated by the levels available," because returns are close to the level U.S. inflation is running at, said William Larkin, portfolio manager with Cabot Money Management in Salem, Mass.
The Fed has moved swiftly to cut the fed funds target rate to 3.0 percent from 5.25 percent as recently as September, with 125 basis points of that easing since late January.
Bond investors were looking ahead to retail sales data and remarks from Federal Reserve Chairman Ben Bernanke later this week. These events could shed further light on whether the economy is in recession and what policy-makers' response in the next few months may be.
January retail sales figures will be released on Wednesday and will be closely watched because consumer spending accounts for around 70 percent of U.S. economic output.
Bernanke testifies to Congress on the economy on Thursday.