Government bond prices cut their steepest losses Monday as stocks fell further, but fading hopes that the Federal Reserve would continue to cut interest rates aggressively still weighed on Treasurys.
Wall Street, coming off the Dow's strongest week in two months, opened lower. Losses widened moderately as equities were dragged down by bank stocks after disappointing results from Bank of Americaand National City.
"We saw some short-covering in bonds on the weak equity performance," said Andrew Brenner, senior vice president of MF Global in New York.
The price of the benchmark 10-year Treasury note, which moves inversely to its yield, was down 8/32 in late morning trade, less than the 12/32 loss it posted earlier. Its yield eased to 3.74 percent from 3.76 percent earlier Monday but above 3.71 percent late Friday.
Ian Lyngen, interest-rate strategist at RBS Greenwich Capital in Greenwich, Conn., said Treasurys trimmed losses as stocks ground "a little bit" lower.
"Stocks opened lower and bonds sold off despite that, but then the move lower in stocks became sharp enough that Treasurys caught a bit of a bid," Lungen said.
"We're not making a great deal out of the bond market's move this morning from a strategic perspective," Lyngen said.
"It doesn't reflect any big change from a broader economic or monetary policy perspective."
Derrick Wulf, portfolio manager at Dwight Asset Management Company in Burlington, Vt. said Treasury auctions of new two- and five-year Treasury notes this week could affect some positions, but said setting up positions before the auctions would emerge more as a factor in Tuesday's trade.
Meanwhile, with no new economic data to guide them, "Treasury market participants can sit around having academic discussions about what they think the Fed's going to do or they can watch stocks -- so they're watching stocks," Wulf said.
Treasury debt prices were on the defensive last week as investors favored riskier assets like stocks over safe-haven government debt. For the week, the Dow advanced 4.3 percent, the S&P 500 rose 4.3 percent and the Nasdaq climbed 4.9 percent.
That willingness to buy stocks showed a less dire view of the economy's prospects, leading to the prospect that the Fed might slow the pace of monetary ease.
In early April, when the release of the March jobs report suggested that the United States had entered a recession, the dominant view was that the Fed would cut its benchmark federal funds rate to 1.5 percent from its current 2.25 percent, with a half-percentage-point cut likely on April 30.
Fed funds futures contracts now reflect market expectations for a reduced, quarter-percentage-point rate cut on April 30.
Two-year Treasury note yields rose to 2.20 percent from 2.14 percent Friday when they briefly rose above 2.25 percent, putting the two-year yield above the prevailing fed funds rate for the first time in almost two years.
News that the Fed set a 2.05 pct minimum bid rate on Monday's $50 billion auction of 28-day funds from its Term Auction Facility (TAF) -- winning bidders to be announced on Tuesday -- had no discernible impact on prices.