NEW YORK: US government debt prices gained on Tuesday as bargain hunters snapped up Treasuries for the second day following last Friday's sharp sell-off on inflation fears and weakness in the stock market revived a safe-haven demand for bonds.
Bargain-minded domestic and overseas investors stepped back into bonds with 30-year US Treasury yields rising to 4-1/2-month highs on Monday. The revived buying in bonds overshadowed concerns about rising inflation on open-ended bond purchases from the Fed and the European Central Banks, traders and analysts said.
"It's difficult for bond bears to counter this move so far," said Jason Rogan, director of Treasuries trading at Guggenheim Partners in New York.
The safe-haven bid drew strength on two fronts - a maritime dispute between Japan and China - and protests in Libya and the Middle East against the United States.
The bond market has recouped about half its losses after Friday's sell-off, when the benchmark 10-year US Treasury note's yield recorded its biggest one-day rise since October on fears that the Fed's third round of bond purchases, known as QE3, will fire up inflation as it was intended to reduce unemployment.
As investors assess the long-term inflation implications of QE3, a top Fed official said on Tuesday the US central bank could still do more to reduce unemployment even if it produces slightly higher inflation.
The ECB's own aggressive bond-purchase program announced earlier this month further stoked inflation worries that too much cash is being pumping into the banking system, analysts said.
The new Fed and ECB bond programs are "so powerful. It's going to increase inflation expectations," said Dimitri Delis, fixed-income strategist at BMO Capital Markets, in Chicago.
Higher inflation expectations will likely exert upward pressure on bond yields in the long run with intermittent pullbacks, he said.
"The overall trajectory for yields will be higher. Things don't on a straight path," Delis said.
Inflation expectations spiked on Friday, a day after the Fed's QE3 announcement, but have retreated from their highest level since 2006 along with weaker equity and oil prices, according to analysts.
A measure of longer-term inflation expectations is the yield premiums, or inflation breakeven rates, on regular Treasuries over Treasury Inflation-Protected Securities (TIPS).
The 10-year TIPS breakeven rate, which gauges investors' inflation expectations, was 2.57 percentage points midday Tuesday, down 3 basis points from Monday's close. It rose above 2.70 points on Monday, analysts said.
Another inflation indicator also retreated, even after Chicago Fed President Charles Evans said the Fed could enact more stimulus to bolster a sluggish economy.
The spread between five-year and 30-year yields was 2.31 percentage points, down about 1 basis point from Monday. It ended at 2.37 percentage points on Friday, the widest since September.
The 30-year bond rose 14/32 to yield 3.012 percent, down 2 basis points from late Monday. The 30-year bond's yield rose to an intraday high of 3.121 percent on Monday, which was the highest since April 25, according to Reuters data.
The benchmark 10-year note gained 12/32 to yield 1.802 percent, down 5 basis points from Monday's close.
The 10-year yield touched a four-month high on Friday at 1.894 percent. It stayed below its 200-day moving average on Tuesday, a technical signal the 10-year yield might have peaked at least in the near term.
On Wall Street, the Standard & Poor's 500 slipped 0.23 percent. US oil futures slipped 58 cents to $96.04 a barrel.
Financial markets shrugged off news about improving confidence among US home builders, which is seen as a predictor of housing construction.
The National Association of Home Builders said on Tuesday its sentiment index rose to 40 in September, its highest level more than six years. In August, the index stood at 37.
On Wednesday, the US government will release its August housing starts figures at 8:30 a.m. (1230 GMT). Analysts predicted starts likely improved to a 765,000 annualized unit rate from a 746,000-unit pace in July. Six years ago, home construction was running at more than twice the current rate.
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