×

Treasury yields pull back amid late-market selloff

Traders work in the S&P 500 options pit at the Chicago Board Options Exchange.
Getty Images
Traders work in the S&P 500 options pit at the Chicago Board Options Exchange.

Bonds sold off on Tuesday as stocks closed lower after spending most of the session higher on a rebound in oil prices and China's decision to lower its benchmark interest rates.

Traders said the bond market was focused on how equities were trading, and the stock market wipeout in the final hour of trading pushed bond prices off their lows.

"Everyone was waiting for China to do something. To be up 300 to 400 points and now be down on the day is a little bit of a scratch your head," said Justin Lederer, rate strategist at Cantor Fitzgerald.

At their peak, benchmark 10-year Treasury note yields were up 14 basis points, eyeing their biggest one-day point gain since July 2013, at 2.14 percent, but the yields cooled after U.S. stocks turned negative, staging their biggest downside turnaround since October 2008.

Read MoreS&P, Dow close lower in biggest reversal since 2008

Ten-year note yields recovered from four-month lows to trade around 2.091 percent, up 9 basis points on the day. In longer-dated debt, 30-year bond yields jumped to 2.819 percent, up 9 basis points and off a session high of 2.86 percent.

"I think it's a little bit of consolidation and a little bit of stability coming from China's actions today. I wouldn't get too comfortable with it if I were trading bonds today," said Bob Andres of Andres Capital Management, which oversees fixed income portfolios for institutions and private clients.

The market headwinds seen this week and last week have led investors to reassess their expectations for the timings of a U.S. Federal Reserve interest rate rise. A hike in September—the first in nine years—is now seen as less likely.

Benchmark 10-year notes briefly spiked on Tuesday after Citigroup reiterated its forecast that the Federal Reserve will raise interest rates in September, citing signs of containment.

Watch: Read MoreAre bonds a safe haven for investors now?

In a note to clients, the investment bank said "market volatility can gather enough momentum to induce global contagion and become systemic. But not yet." The call is the latest sign of the growing level disparity among Wall Street of when the Fed will lift off on rates.

"I don't think it matters if the Fed tightens. The Fed is not tightening; if they tighten it will not be for any economic reasons, but to try and normalize the spread of financial instruments," which have been out of order since the financial crisis in 2008," Andres said in an e-mailed statement.

Yields extended gains earlier after the Chinese central bank announced plans to cut its one-year lending rate to 4.6 percent, which the People's Bank of China said was provide long-term liquidity and help support the economy.

"I think it's a little bit of consolidation and a little bit of stability coming from China's actions today. I wouldn't get too comfortable with it if I were trading bonds today. This is the fifth cut that they've made in interest rates, and doing it now after the [currency] devaluation certainly tells you that they have a problem," Andres said.

The Treasury Department's $26 billion auction of two-year notes met weak demand.

The notes, the first batch of this week's $90 billion debt offering, sold at a high yield of 0.663 percent, which was lower than the previous auction in July. The bid-to-cover ratio, an indicator of demand, was the lowest since October at 3.16 and below the recent average of 3.41.

Indirect bidders, which include major central banks, were awarded 47.1 percent, well above the 44 percent average. Direct bidders, which includes domestic money managers, bought 10.3 percent.

Two-year note yields were up 5 basis points at 0.62 percent, not far from a session high of 0.64 percent. The Treasury will auction $35 billion in five-year notes on Wednesday and $29 billion in seven-year notes on Thursday.

Symbol
Yield
 
Change
%Change
US 3-MO
---
US 1-YR
---
US 2-YR
---
US 5-YR
---
US 10-YR
---
US 30-YR
---

In equity markets, benchmark U.S. stock indexes each climbed as much as 2 percent, initially shrugging off weakness seen in China, before turning lower in late-trading.

Stock markets in Asia fell further in the final hour of trading on Tuesday, with the Shanghai Composite settling below the key 3,000 mark, to end the day down 7.6 percent.

Read MoreMarkets latest: China slides 7.6%; Europe bounces

In Europe, equities also bucked the weakness seen in Asia, with the pan-European Stoxx 600 surging over 4 percent.

Oil prices recouped some losses, with U.S. light crude closing up about 3 percent, while benchmark Brent prices were flat at $43 a barrel. Both contracts are still down about 17 percent for the month.

What we're watching this week:

While traders will be preoccupied with the extreme moves in global markets, elsewhere the coming week's annual Economic Policy Symposium at Jackson Hole, Wyoming, which brings together academics, financial market participants and many of the world's leading central bankers, could provide important signals as to near-term monetary policy action in the U.S.

In addition, Federal Reserve Vice Chairman Stanley Fischer will speak later this week.

Thursday will brings this week's data highlight, with the second reading of U.S. second quarter gross domestic product.

Some important housing data is also due for release throughout the week, including the release on Wednesday of durable goods orders and mortgage applications, followed on Thursday by pending home sales and jobless claims data.

—CNBC's Patti Domm contributed to this report.