The US Treasury prices were higher on Tuesday, picking up a stronger bid as stock market losses increased in early afternoon. The S&P 500 index slipped to its lowest level in a month and the tech-heavy Nasdaq sagged to its lowest since late November. Earlier, a handful of second-tier economic data had little impact on bond prices as traders continued to favour curve-flattening trades on the outlook for more hikes to short-term interest rates by the Federal Reserve.
Two-year Treasury notes, which closely reflect perceptions on Fed policy, were steady at a yield of 3.22 percent after hitting 3.24 percent, a new high for the current cycle and the highest since May 2002.
The two-/10-year yield spread narrowed to 103 basis points, the lowest since mid-2001, after hurdling resistance at 106 to trigger more buying in longer-dated maturities.
The next target for the spread is 100 basis points and then 87 basis points.
The 10-year Treasury note was up 8/32 in price for a yield of 4.24 percent, down from 4.28 percent late Monday. The 30-year bond rose 19/32, yielding 4.78 percent, down from 4.82 percent.
Five-year notes came under pressure ahead of Wednesday's scheduled auction of $15 billion in new paper. Dealers often try to cheapen prices into such a sale to attract private investor demand.
Five-year notes rose 3/32 to yield 3.71 percent, down from 3.73 percent.
Bonds dipped early when the latest J.P. Morgan survey of Treasury clients showed the number of net shorts dipped to a seven-week low.
"Fewer short positions means there's more room for people to sell," said one trader at a US primary dealer.
"It's a contrarian indicator for the market and in this case the drop in shorts is a bearish sign."
December Eurodollars held above lows set on Friday and imply a federal funds rate of just over 3.50 percent by the end of 2005, up from the current 2.25 percent.
However, dealers see room for a decline in rate futures given the Fed's current hawkish mood - most recently, Monday's comments by Atlanta Fed President Jack Guynn, who warned markets not to assume continued, steady, small rate increases.
"If the (Fed's) strategy is changed, it is more likely to be in favour of an acceleration in the pace of tightening rather than a pause," Richard Iley, senior economist at BNP Paribas, said in a research note.
Among the day's reports, the Investors Business Daily January consumer confidence index rose to 56.2 from 54.5.
The uptick could provide a clue to confidence measures from the Conference Board and the University of Michigan due later in the month.
Year-on-year growth in US chain store sales slowed in early January, according to surveys by Redbook Research and the International Council of Shopping Centers.
December retail sales, arguably this week's biggest report, are due on Thursday and forecast to show a hefty 1.0 percent gain on the back of strong auto demand.
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