U.S. government debt prices fell on Tuesday as gains in the stock market reduced the appeal of safer but low-yielding bonds, but worries over the possible federal spending cuts and outcome of the upcoming Italian election limited bond losses.
Analysts downplayed the day's decline as they await release of the minutes of the Federal Reserve's January policy meeting on Wednesday and a slew of economic data on Thursday.
Tuesday's mildly disappointing data on U.S. housing from National Association of Home Builders were not enough to scuttle the rise on Wall Street.
"Bad news can't seem to take stocks down. People are saying, 'I need to get into stocks and not stick my money in bonds earning 2 percent," said Stan Shipley, bond strategist at ISI Group in New York.
On below-average volume, benchmark 10-year notes last traded 7/32 lower in price for a yield of 2.03 percent, up 2.5 basis points from Friday. The 10-year yield has been bouncing in a 20 basis point range in the past three weeks.
Thirty-year bonds were down 20/32 in price, yielding 3.213 percent, up 3.3 basis points from Friday.
Wall Street stocks ended higher, hovering near five-year highs, with the Standard & Poor's 500 gaining 0.7 percent on the day.
U.S. financial markets were closed on Monday for the Presidents Day holiday.
(Read More: Don't Exit US Junk Bond Trade: UBS)
Encouraging German Data
Treasurys dipped in price overnight after a measure of German analyst and investor sentiment soared to the highest level since April 2010, according to the ZEW think tank. The data boosted the euro and European shares and caused a temporary dip in safe-haven German Bunds and U.S. debt.
But the price dip was immediately met by buying interest from investors concerned that an economic recovery could be derailed by across-the-board U.S. government spending cuts of about $85 billion that could take effect on March 1 if lawmakers fail to agree on a plan to avoid them.
Also supporting Treasurys, one of the main assets used as a refuge from the euro zone's debt troubles, were concerns that Italian elections on Feb. 24-25 could result in a fragmented parliament that could hamper future reform efforts.
Investors also will watch closely several releases later in the week, with housing starts and homes sales data on Wednesday and Thursday, along with January producer and consumer price indexes. Minutes from the Federal Reserve's latest policy meeting in January will also come out on Wednesday afternoon.
Earlier Tuesday, the National Association of Home Builders said U.S. home builder confidence in the market for single family homes unexpectedly dipped February from last month's seven-year high, as they faced higher costs.
In the meantime, steady bond purchases from the Federal Reserve will keep a lid on bond yields. The U.S. central bank has been accumulating Treasurys and mortgage bonds in a bid to hold down long-term borrowing costs to help the economy.
On Tuesday, the Fed purchased $1.45 billion of U.S. government debt maturing February 2036 through February 2043. It will buy longer-dated debt in three more operations through the rest of the week.
"The Fed is still a big marginal buyer. There are still other natural buyers out there because they need the yield," said Justin Lederer, Treasury strategist at Cantor Fitzgerald in New York.