Treasurys were weaker Tuesday but off their lows as traders skipped back and forth between stocks and bonds on worries about a recession induced by the prolonged deterioration in the housing market.
Bond prices initially slipped with gains in equities, but the early losses dwindled as stocks slid into negative territory on rumors of financial problems at Countrywide Financial, the largest U.S. mortgage lender.
"Right now people are so nervous about the equity market that anytime you get a little bit of a fade you are going to get a bid in bonds," said Bill Hornbarger, chief fixed-income strategist at A.G. Edwards & Sons in St. Louis.
Major U.S. stock indexes were lower, with the Standard & Poor's 500 index down 0.3 percent after opening 0.2 percent higher.
Treasuries rebounded from their session lows but struggled to move into positive territory because they are deemed expensive until there are further signals that the Federal Reserve will slash interest rates even more than what Wall Street is predicting in the coming months.
Tuesday's speeches by two regional Fed presidents solidified current expectations on the degree of easing in monetary policy; they also confirmed the current valuation on Treasurys, especially shorter-dated issues, analysts said.
"The perception is that there is not much more upside on the front-end," said William O'Donnell, director of interest rate strategy at UBS Securities in Stamford, Conn.
Two-year U.S. government notes , most sensitive to the market's outlook on Fed policy, were down 1/32 in price for a 2.78 percent yield, up 2 basis points from late Monday.
Bond prices and yields move in opposite directions.
The price on the benchmark 10-year Treasury note was down 5/32, recovering from an early 16/32 loss.
Its yield was 3.86 percent, up 2 basis points from late Monday.
On Tuesday, Philadelphia Fed President Charles Plosser and Boston Fed President Eric Rosengren cited heightened downside risk to the economy as a result of the deepening housing slump.
Plosser, who is a voting member of the Fed policy-setting group this year, said he was open to further lowering of the federal funds target rate, currently at 4.25 percent.
The cautionary language used so far this week by Fed officials has reinforced the market's view that the Fed will pare the fed funds rate at its Jan. 29-30 meeting by at least a quarter percentage point.
"The (Fed's) view is very much that long-run inflation is what matters, but it doesn't mean if we are heading into a recession, the Fed wouldn't do everything in its power to soften it," said Peter Kretzmer, senior economist at Bank of America in New York.