U.S. government bond prices rose Tuesday as worries about credit markets and slipping equities prompted investors to seek the safety of Treasurys.
Disappointing earnings and outlooks from banks like Wells Fargo suggested problems from the credit squeeze will be prolonged, pushing U.S. stocks lower and creating a bid for U.S. government bonds.
"We did have another flight-to-liquidity bid ... in part driven by the continued decline in equities over the past several trading sessions," said Michael Pond, Treasury strategist with Barclays Capital in New York.
The benchmark 10-year note's price traded up 5/32 for a yield of 4.66 percent, compared with 4.68 percent late Monday. Bond yields and prices move inversely.
The two-year note -- which responds closely to expectations for central bank interest rate moves -- traded up 4/32 in price for a yield of 4.16 percent, compared with 4.23 percent late Monday.
Investors seeking shelter from declines in stocks typically favor short maturities within the Treasury curve. Indeed, two-year yields were on course for their biggest one-day decline in a month as stocks fell and other so-called safe-haven assets such as gold rallied.
U.S. government bonds briefly pared some gains after Treasury Department data showed a hefty capital outflow from U.S. assets in August of $163.0 billion. But the data, which hurt the U.S. dollar, did not have a lasting impact on Treasurys.
"It's relatively stale data and it shouldn't be too much of a surprise because (during the period of) increased volatility foreigners were shying away from U.S. assets. The market has calmed down since and there are indications that foreign buying is back," Pond said.
He said that custody holdings of U.S. Treasurys for foreign official accounts had picked up after dropping during August.
Bonds barely moved after an industrial output reading was in line with consensus forecasts. A U.S. housing market index for October is due later in the session.
In addition, investors were mulling banks' plans to establish a fund aimed at preventing the dumping of billions of dollars of bonds linked to subprime mortgages and other debt.
"There is a lot of skepticism about this super SIV (structured investment vehicle) and increased renewed fears about the CDO (collateralized debt obligations) fallout, which are driving a bid into Treasurys," said T.J. Marta, fixed income strategist with Royal Bank of Canada Capital Markets in New York.