US Treasury debt prices closed modestly higher on Wednesday, shaking off mixed economic news to focus on record high crude oil prices. US crude oil futures hit a new record closing high of $67.32 a barrel, up $1.61 or 2.5 percent. The rally dragged stocks lower and created a bid at the long end of the yield curve.
Some view rising energy prices as inflationary, but the first impact is likely to be an erosion in consumer spending, as has already been seen in recent weekly chain store sales.
The 10-year Treasury note rose 3/32 for a yield of 4.17 percent, similar to late Tuesday, after trading as low as 4.15 percent.
The two-/10-year yield spread showed a flattening bias as the energy price spike stirred up doubts about US economic growth prospects.
Earlier, bond prices jumped after weaker-than-expected durable goods orders for July but faded after news of record high new home sales for the month.
Results of the Treasury's $20-billion monthly two-year note auction were termed solid, with strong participation from overseas buyers.
The note was awarded at 4.014 percent, in line with expectations. Indirect bidders, a category that includes foreign central banks, picked up 41.8 percent of the issue, the highest since November.
Two-year note yields were at 3.98 percent, in line with Tuesday.
After the close, Moody's Investors Service cut the ratings of US car giants Ford Motor Co and General Motors Corp to junk status. "This is not a shock. The market is pretty well prepared for this," said Rick Klingman, head of US government trading at ABN Amro.
Traders were inclined to discount the durable goods report because the series is volatile and prone to revision. The July result also came on the heels of two months of solid gains.
July durable goods orders were down 4.9 percent compared with a a downwardly revised increase of 1.9 percent in June.
A drop in transportation equipment orders set the tone, although orders excluding transportation also fell by a bigger than expected 3.2 percent.
"Today's report suggests a less vigorous upswing in capital spending, but still a positive longer-term trend," said economists at Goldman Sachs.
US new home sales for July jumped 6.5 percent on the month to 1.410 million units on an annualised basis.
The report was contrary to the Tuesday's reading of soft existing home sales and suggested that calls for a swift end to the housing boom may be premature.
Chicago Fed President Michael Moskow speaks in suburban Chicago at 6 pm EDT (2200 GMT) and is likely to be quizzed about whether soaring energy prices will cause the Fed to pause its year-long program of measured rate hikes.
The 30-year bond rose 7/32 to yield 4.39 percent, unchanged on the day. Five-year Treasury notes were up 2/32 at a yield of 4.03 percent, down from 4.04 percent.