Bonds Move Higher Following Active Auction

Treasury debt prices turned firmly higher Tuesday afternoon after relatively decent demand in an auction of 1-year bills, and with some safe-haven buying as stocks extended losses.

Benchmark 10-year Treasury notes were trading 12/32 higher in price for a yield of 3.92 percent from 3.97 percent late Monday, while 2-year Treasury notes were trading 4/32 higher for a yield of 2.44 percent from 2.51 percent.

Treasury debt prices pared earlier losses as falling stock in Lehman BrothersHoldings spurred safe-haven bidding for government debt.

Bonds were lower in the morning after Federal Reserve Chairman Ben Bernanke invoked inflation concerns stemming from a weak dollar but added current interest rates were "well positioned" to deal with growth and price risks. Data showing a surprise increase in factory orders in April, which supported the view the US economy could skirt a recession, also weighed on bonds.

"Bernanke is still leaving the impression that he's done easing. Whenever we get those kind of reminders it just seems to be there is some profit taking in our market," said Rick Klingman, managing director of Treasury trading at BNP Paribas in New York.

The bond market's focus on inflation displaced its earlier attention to credit problems in the financial sector, which on Monday had triggered a stock sell-off and Treasury market rally.

On Tuesday, the fall in Treasurys was limited as the stock market struggled to keep the gains it made earlier.