Treasury prices rose as fears about the deteriorating economy and an unwillingness to take risks gained an edge over worries about rising inflation.
Government bonds initially sold off across the maturity curve after data for last month showed the biggest annual rise in wholesale U.S. inflation since October 1981, echoing a report last week that showed the biggest rise in underlying consumer inflation since June 2006.
Such signs of inflation would normally be a green light to sell safe-haven Treasurys. But weakness in stocks, the ongoing credit crisis and housing sector recession have all confounded investors on that front, while the Federal Reserve maintains that inflation will gradually decline.
The nail in the coffin could be if consumer spending falters, which would all but ensure the economy contracts and suggest the Federal Reserve may have to continue aggressively cutting interest rates.
Foreboding data on Tuesday showed the lowest reading of consumer confidence this month since March 2003.
"Lights out for the consumer, apparently," said Chris Rupkey, senior financial economist with Bank of Tokyo-Mitsubishi UFJ in New York. "In fact, the levels we are at now are suggestive of a recession. ... Consumers are very pessimistic but let's see if they stop spending."
Benchmark 10-year Treasurys rose 12/32 in price to yield 3.86 percent, down from 3.90 percent late Monday.
However, given the 10-year yield's 20 basis point rise in February, it would need to fall below around 3.75 percent to break a rising trendline, according to Reuters data.
Thirty-year bonds rose 12/32 in price to yield 4.64 percent, down from 4.67 percent.
The two-year note was up 5/32 to yield 2.03 percent , down from 2.12 percent.
The spread of the 10-year yield over the 2-year was relatively steady at about 182 basis points, off a 3-1/2-year high of 192 basis points reached two weeks ago.
Focus in the market was quickly shifting from economic data to speakers. Fed Vice Chairman Donald Kohn will speak on monetary policy at 12:15 p.m. ET on Tuesday, and Fed Chairman Ben Bernanke will likely shed light on the central bank's views on the economy and interest rates at much-awaited Congressional testimony on Wednesday and Thursday.
Analysts do not believe the Fed will shift its laser-like focus from shoring up growth despite inflation pressures.
"The Fed will opt to focus on the serious risks to growth and presume that the weak economy will bring inflation down with a lag," said Josh Stiles, senior bond strategist with IDEAGlobal in New York. "But this cycle might be different from past episodes because we have building Asian demand that keeps commodity prices high."
Despite the bid at the long end, analysts said yield curve steepening trades are still in vogue.
The fundamental argument for yield curve steepening is that the Fed continues to cut benchmark short-term interest rates to limit an economic slowdown while inflation readings remain firm enough to require a premium for long-dated bonds.
Those two factors -- slowing growth and rising inflation -- were certainly on display Tuesday.
Bill Gross, chief investment officer for Pacific Investment Management Co, the world's largest bond fund, said on Tuesday that Treasurys hold little appeal with inflation surging and effectively cut the firm's holdings to none.