A refusal by Congress to raise the debt ceiling would raise the risk that the United States would default on its debt by the spring. Fed Chairman Ben Bernanke urged lawmakers on Monday to lift the country's borrowing limit to avoid a debt default that would put the economy at risk.
Weaker stock prices, as world stock markets stalled near 18-month highs, also fed the bid for safe-haven US debt.
"There's a little bit of a risk off trade," said Thomas Graff, fixed-income portfolio manager at Brown Advisory in Baltimore, Maryland. "It looks like stocks are reacting negatively to the wrangling over the US debt ceiling so Treasuries are higher."
The likelihood of the US not raising the debt ceiling and declaring default is "very low," Graff said.
"But a lack of resolution might result in the sequester going through, which would be a bigger fiscal drag than is priced in now; and if growth is slower, that's positive for Treasuries," he said.
Benchmark 10-year notes rose 11/32, their yields easing to 1.81 percent from 1.85 percent on Monday. Thirty-year bonds rose 24/32, their yields easing to 3 percent from 3.04 percent on Monday.
"We started the year with strength in risk assets and traded off in Treasuries and now we're seeing a slow grind toward lower yields as people take some risk off the table," said Matthew Duch, portfolio manager at Bethesda, Maryland-based Calvert Investments, with $12 billion in assets under management.
US government data revealed that inflation on the wholesale level was subdued in December, with prices excluding food and energy rising just 0.1 percent, supportive for US Treasuries.
Retail sales, however, were stronger-than-forecast in December, a result that prompted some short-lived profit-taking in Treasuries.
Bonds also got support when Fed Chairman Ben Bernanke, in a question and answer session at the University of Michigan on Monday, offered no sign that the Fed would curb its aggressive bond purchases despite speculation - raised by the release of minutes from the Fed's most recent policy meeting - that purchases could end this year.
The Fed minutes led to a sharp selloff in the bond market.
Bernanke said the economy appeared to be responding to the Fed's aggressive easing of monetary policy, but not as fast as the central bank would like.
"The impression Bernanke left was a little more dovish than what the initial reaction to the Fed minutes was," Graff said. "That was probably purposeful on his part. He wanted to make sure the minutes did not communicate the wrong message. We're a good ways away from conditions where any monetary tightening would be necessary."
The Fed has held interest rates near zero since December 2008 and last month decided to keep buying $85 billion worth of Treasury bonds and mortgage-backed securities a month until it saw a significant improvement in the labor market outlook.
"Bernanke talking about continued QE (quantitative easing) helped Treasuries," Duch said. "He indicated that it was an effective tool and that he still sees a need for it."
Duch said the Fed is trying to keep the monetary stimulus pedal down to help the economy counteract contractionary influences on the economy like the debt ceiling conflict, the payroll tax cut expiring, and potential budget cuts.
"If there was any thought, based on the minutes of the last Fed meeting, that the Fed would stop QE, Bernanke's comments essentially told people not to jump to that conclusion," Duch said. "As long as inflation is benign, Bernanke sees quantitative easing as 'No harm, no foul.'"
On Tuesday, as part of its $45 billion monthly purchases of government securities aimed to lower unemployment, the Fed bought $0.927 billion in Treasury coupons with maturities ranging from February 2023 to February 2031.