US Treasury debt prices fell in thin pre-holiday trade on Monday because of perceptions that the underlying components of a manufacturing report were stronger than the overall figure suggested.
But news of a surprising drop in construction spending helped Treasuries recoup some of their earlier losses, which were triggered by profit-taking after last week's rally.
"The ISM report was a touch weaker than we were looking for, but the underlying parameters of that report are not as weak as the headline figure suggests," said Gary Pollack, principal and head of fixed-income trading and research at Deutsche Bank Private Banking.
"If you take that away, the report was a little stronger. That is why the market has not rallied," Pollack said. The benchmark 10-year US Treasury note fell 2/32 while its yield was 5.16 percent, up slightly from 5.15 percent late on Friday.
Bond yields and prices move inversely.
"The reaction to the economic news was a way to push the yields a little higher so as to attract investors," Pollack said.
The headline number in the Institute for Supply Management's manufacturing report fell to 53.8 in June from 54.4 in May, short of economists' forecast for a rise to 55. The ISM manufacturing prices-paid index, which measures inflationary pressures in the sector, fell to 76.5 in June from 77.0 in May.
Market expectations for a more than even chance of a Fed rate hike in August remained intact after the manufacturing data.
"It doesn't provide any kind of clue that the Fed has to come in and tighten on August 8, so the jury is still out. Next up: employment on Friday," said Kevin Flanagan, fixed- income strategist for global wealth management with Morgan Stanley in Purchase, New York.
The June non-farm payrolls report - a major catalyst for the bond market - will be released on Friday. Earlier on Monday, the market gave back some of last week's quarter-end gains in scant volume as bond traders prepared for a recommended early close for US bond markets at 2 pm (1800 GMT) before Tuesday's July 4 holiday for US Independence Day.
Fed funds futures continued to show bets on a 68 percent chance that the Fed will raise rates again at its August 8 policy meeting, with much depending on this Friday's employment data.
Two-year notes - the most sensitive to expectations on interest rate shifts - traded unchanged at a price of 99-29/32 to yield 5.18 percent, steady with where it was just before the data, and slightly above 5.17 percent late on Friday. The 30-year bond fell 8/32 for a yield of 5.21 percent, versus 5.19 percent late on Friday.
Last week, at the end of its June 28-29 policy meeting, the Federal Reserve raised its key fed funds rate by 25 basis points to 5.25 percent, its 17th consecutive rate increase. But the central bank left the door open for a pause, saying moderating growth could cool inflation pressures.