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Bonds up after sell-off on signs of softer growth

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U.S. Treasury bonds rose on Monday on bargain hunting encouraged by fresh signs of spotty economic growth, which might slow the Federal Reserve's shift away from loose monetary polices.

After a sell-off last week, benchmark 10-year Treasury notes—whose yields are used to calculate mortgage rates and other consumer loans—rose 6/32 in price to yield 2.59 percent.

Meanwhile, 30-year bonds rallied 10/32 in price to yield 3.33 percent were.

The Fed's statement is due on Wednesday with a press conference with Chair Janet Yellen shortly afterwards. Investors are anxious to learn when the central bank might opt to hike interest rates.

"U.S. data is now consistently humming...this is causing mass speculation that a language change to the (Fed's) statement is imminent," Evan Lucas, a strategist at IG Markets said in a research note.

"It's that circular argument that weak growth is going to inhibit the Fed from raising rates any time soon," said Kim Rupert, managing director at Action Economics in San Francisco.

U.S. manufacturing output unexpectedly fell for the first time in seven months in August as motor vehicle production declined, but the underlying trend remained consistent with steadily rising factory activity, according to Fed data released on Monday.

Trading was also driven in part by unexpectedly strong New York State manufacturing data but which also contained weak jobs indicators, Rupert said.

While manufacturing activity in New York State accelerated at its fastest pace in nearly five years in September, the report from the Federal Reserve showed measures of employment slowing.

"The employment components took some of the wind out of the stronger figure, however, with the number of employees falling to 3.26 from 13.64 (the lowest this year) and the average workweek declining," TD Securities strategist Gennadiy Goldberg told clients.

Over the weekend, China released a raft of data that raised concerns about a weakening economy. August industrial output rose 6.9 percent on year, its slowest pace since 2008, while fixed-asset investment and retail sales both missed forecasts.

Read MoreIs fresh China stimulus a done deal?

Geopolitics also weighed on sentiment, with fighting reported in eastern Ukraine on Saturday after an eight-day ceasefire.

Meanwhile, Australia became the first country to join the U.S.coalition fighting Islamic State militants and U.K.Prime Minister David Cameron said he was considering increasing military participation following the beheading of a British hostage.

—By Reuters with CNBC