US Treasury debt prices rose on Tuesday as hope that the Federal Reserve might stop raising interest rates after its next policy meeting prompted some short-covering following recent setbacks.
"You have seen a pretty significant rise in open interest in the Treasury futures market since the middle of last month as prices have declined, suggesting a pretty substantial short base out there, so we've held our footing so far this week," said John Canavan, market analyst at Stone and McCarthy Research Associates.
He said the firmer tone emerged early in the session when a softer-than-expected ZEW survey of German investor sentiment lifted bunds. "Stocks were also under pressure and that helped out a little," Canavan added.
Wall Street stocks fell on Tuesday, pushing the Nasdaq Composite down nearly 1 percent, as worries about high oil prices helped send shares of technology and semiconductor firms tumbling.
In the Treasuries market, investors expect the Fed to raise interest rates to 5 percent, from the current 4.75 percent, at its next policy meeting on May 10. But debate is lively over the likelihood of another move after that.
Sensing a possible end to rate increases, traders bid benchmark 10-year notes higher in price, pushing the yield in the opposite direction to 4.93 percent from 4.96 percent on Monday.
Chances of a June rate hike are now split almost evenly, with a 52 percent chance of a rate increase reflected in the price of fed funds futures contracts.
In the weeks leading up to the next Fed meeting, investors are listening closely to remarks by individual Fed officials. Together, those comments have been viewed as a mixed bag, with some officials hinting at a pause in monetary tightening but others seeming to indicate that rates might need to rise further to ward off inflation.
Some analysts believe the Fed's tone was pointing more toward an end-game than to any continuation of the central bank's rate-hike campaign.
On Tuesday, Dallas Federal Reserve chief Richard Fisher, a non-voting member of the Fed's policy-making Federal Open Market Committee, reiterated the idea that the Fed would be data-dependent when setting monetary policy.
Fed Bank of Minneapolis President Gary Stern, speaking in Berlin, noted the "lags between policy actions and their effects," a phrase that could be construed as dovish. But Stern spoke in the context of the key role economic forecasts have in Fed decision-making and evoked no discernible market reaction.
At the margins, high oil prices were also benefiting Treasuries, since dealers viewed the spike as a potential drag on economic growth.
"If the housing market is cooling at the same time as gasoline prices are picking up that could combine to create a perfect storm for consumer spending," said Elisabeth Denison, economist at Dresdner Kleinwort Wasserstein. "This is something the Federal Reserve will watch very closely."
An announcement by the head of Tehran's Atomic Energy Organisation that Iran has enriched uranium to the 3.5 percent grade needed for nuclear reactor fuel appeared to have little immediate impact on prices of US Treasuries.
"There's a lot of uncertainty about what that means," Canavan said. "Prices were already higher. The announcement from Tehran may have helped to underpin that trend, but I don't think it did anything to accelerate it."
Two-year notes US2YT=RR were up 1/32 in late trade and yielding 4.87 percent, compared with 4.89 percent on Monday.
Analysts said lower yields appeared to be the path of least resistance for now, following a sell-off last week that took benchmark rates to their highest in nearly four years.
Five-year notes added 3/32 and were yielding 4.86 percent, while the 30-year bond rose 11/32 to yield 5 percent.