Treasury prices gave up early gains and turned lower Tuesday as Wall Street cut its losses and diminished demand for low-risk bonds.
The Treasury market often takes its cues from stocks. Treasurys, which offer a strong security premium, tend to fall from favor when investor appetite for riskier assets like stocks improves. On Tuesday afternoon, stocks were mixed, but above their morning lows.
Earlier, Treasurys rose after a consumer confidence survey showed unexpected weakness, solidifying the view that the Federal Reserve will cut rates this week.
The Conference Board's consumer confidence index for October slumped to 95.6, its lowest level in two years, from 99.5 in September. Many economists expected a reading near 98.0. The index has not been this weak since the aftermath of Hurricane Katrina.
"This was the third straight hefty fall, and it seems to suggest that the relative strength of the stock market is no longer enough to offset the impact of the housing disaster," said Ian Shepherdson, chief U.S. economist at High Frequency Economics.
The news soothed fears that the Federal Reserve might not cut rates this week. Signs of economic weakness also instill demand for low-risk Treasurys and can cause investors to sell stocks, transferring capital into the bond market.
The central bank's two-day meeting will wrap up with a policy announcement Wednesday afternoon.
The benchmark 10-year Treasury note fell 5/32 to 102 23/32 with a yield of 4.40 percent, up from 4.38 percent late Monday.
The 30-year long bond dropped 12/32 to 104 29/32 with a 4.69 percent yield, up from 4.67 percent late Monday.
The 2-year note fell 1/32 to 99-20/32 with a yield of 3.82 percent, up from 3.80 percent Monday.
Most bond market participants are convinced the central bank will chose between a quarter percentage point decrease or a full half percentage point cut in the benchmark federal funds rate, also known as the overnight lending rate.
But there have been concerns that, despite numerous signs of economic weakness, the bank might chose not to drop rates if it is worried that a weak dollar and spiraling commodities prices will intensify inflation.
"While it seems a foregone conclusion that the Fed will lower the funds rate by at least a quarter percentage point, there is still a chance that they will lower the overnight lending rate by a half percentage point," said Kevin Giddis, managing director of fixed income at Morgan Keegan.
The bank's two-day meeting will wrap up with a policy announcement Wednesday afternoon.