Government debt prices rose, as a surprise loss at a large US bank and data reinforcing the view of weak consumer spending undermined the stock market and supported demand for low-risk bonds.
Bond prices had initially risen on safe-haven bids sparked by weak results at Wachovia, the fourth-largest US bank, which resurrected worries about the extent of the credit crisis.
A government report showing a tad higher-than-forecast rise in March US retail saleseased worries that the economy was rapidly deteriorating. Bond prices slipped on the report as it lowered expectations that the Federal Reserve would make additional steep cuts in interest rates, analysts said.
But traders and analysts gradually reassessed their first impression of the retail data and concluded the slight rebound in March after February's drop was not enough to prevent the United States slipping into recession and the Fed from easing monetary easing further.
"It doesn't show any core strength in spending," said Jim DeMasi, chief fixed-income strategist at Stifel Nicolaus in Baltimore.
Economists attributed much of the higher sales to rising prices for necessities at supermarkets and gasoline stations.
Some Wall Street economists are expecting the economy to contract anywhere between 0.5 percent and 1.0 percent in the first half of 2008.
Wachovia's Surprise Loss
While the retail sales report ultimately proved positive for Treasurys, Wachovia's quarterly loss of $350 million triggered a fresh wave of fixed-income buying among investors already rattled by General Electric's disappointing results Friday.
"This is just one more in a growing list of financial services companies that are struggling to keep the ship upright," said Kevin Giddis, managing director of fixed-income trading at Morgan Keegan in Memphis, Tenn.
U.S. financial shares fell, led by Wachovia whose stock was down 10 percent. The broader market was only slightly lower.
Bank earnings, together with this week's data on housing starts and inflation, if they meet expectations will likely support the case for more Fed rate cuts and higher Treasury prices, Stifel's DeMasi said.
"All the recent data suggest that the Fed is going to continue to cut," he said.
Traders see a 50-50 chance the central bank will trim the federal funds target rate by half a percentage point to 1.75 percent at the end of April, according to interest rate futures.
Benchmark 10-year notes' prices , which move inversely to their yields, were up 4/32, erasing an earlier 6/32 loss. The 10-year yield was last at 3.46 percent, down from 3.48 percent late Friday but above its earlier low of 3.43 percent.
Two-year notes were up 2/32, recovering from an earlier 1/32 dip. Their yield was last at 1.72 percent, down from 1.75 percent late Friday.