Many long-term investors had taken to the sidelines in the run-up to Federal Reserve Chairman Ben Bernanke's speech on Friday at the Fed conference in Jackson Hole, Wyoming.
Share prices climbed in Europe and Asia, and September S&P stocks futures were up 1.3 percent with traders saying they were seeing some asset allocation out of fixed income into global equities though moves in Treasuries were exaggerated by holiday-thinned trading volumes.
Gains in stocks came as investors began betting on whether Bernanke would outline new measures to bolster the ailing US economy.
Market participants think the Fed chairman could hint at the possibility of more quantitative easing measures in the future, though many say a bond-buying programme like the $600 billion programme that ended on June 30, would not be as effective because Treasury yields are already so low.
"There's been decent selling in Treasuries, it's all been leveraged selling. Real money is relatively sidelined," Craig Collins, a trader at Bank of Montreal in London, said.
"A lot of people are positioned in neutral, very close to their benchmarks and not taking additional risk."
Benchmark 10-year Treasury notes fell 11/32 in price to yield 2.164 percent, up 5 basis points from late US trade the previous day. The 10-year yield had dipped to around 1.98 percent last week, its lowest in at least 60 years.
The 30-year T-bond price was down 25/32 to yield 3.465 percent with the moves slightly steepening the 10/30-year yield curve to 131 bps.
Two-year T-notes were 1/32 lower in price to yield 0.21 percent with traders pushing for cheaper prices before an auction of $35 billion of the notes later in the day.
Any backup in yields to 25 bps were seen attracting firm demand given the Fed's pledge to keep interest rates near zero until at least 2013.
Another bond-buying campaign, like the one dubbed "QE2" which Bernanke signalled at last year's Jackson Hole meeting, could push Treasury prices lower if it shored up stock market sentiment, strategists said.
"QE3 in the first stage will still be modestly positive for equities and still be probably neutral to slightly negative for the Treasury market," said Pete Lammens, a strategist at KBC in Brussels.
"At the longer end (of the Treasury curve), there you have scope for an expression of the feeling of the market. Treasuries rallied ahead of the QE2 decision, but once it was done, from then on, the Treasuries lost some ground."
Copyright Reuters, 2011