US government bond prices rebounded on Wednesday, with the benchmark 10-year Treasury note posting its best day since March technical factors and reduced selling by mortgage players after Tuesday's rout.
Benchmark yields, however, stayed near five-year highs as investors no longer expect the Federal Reserve to cut interest rates this year. Bonds brushed aside strong retail sales and inflation reports.
Investors drew some comfort from the Fed's Beige Book, which reported that overall wage pressures had not increased, but noted there were "significant" price increases for energy-related products. "It's largely just a correction to a vastly oversold market," said John Canavan, an analyst at Stone & McCarthy Research Associates in Princeton, New Jersey.
"When we had much stronger-than-expected economic numbers this morning and the market failed to find any additional downside despite that, we saw a little bit of a scramble to cover shorts and reverse the steepening trades that had been put on over the past month."
Benchmark 10-year Treasury notes traded 19/32 higher in price for a yield of 5.21 percent compared with 5.29 percent late on Tuesday. In earlier European trade, 10-year Treasury yields jumped to 5.33 percent, their highest in five years.
Volume was around $517.468 billion, above the 20-day moving average of $313.049 billion, according to ICAP. "We had some trading desks that were short going into the Beige Book report expecting that the news was going to be a bit grimmer for bonds," said Georges Yared, chief investment strategist at Yared Investment Research in Minneapolis.
"Investors are a bit calmer, a bit more reassured ... that inflation is a bit under control. The market appears to be settling here and on its way down in yield terms."
The 30-year bond was up 1-18/32 in price to yield 5.28 percent, compared with 5.40 percent late Tuesday. This was the long bond's best day in two-and-a-half years, after Tuesday's thrashing, which was the worst performance in three years.
Treasuries have been hammered by worries that strong global demand will force central banks to raise interest rates, as well as by selling from mortgage players in a move to shed their duration risk after yields jumped above 5 percent.
Analysts said mortgage-related selling was showing some signs of moderating, but caution that it was not over yet. Interest rate futures showed a roughly 12 percent chance of a Fed rate hike by the end of the year. Just a month ago, rate futures were suggesting that traders anticipated a Fed rate cut.
Two-year notes, which are most sensitive to traders' views on Fed policy, were up 1/32 in price to yield 5.09 percent, down from 5.11 percent late Tuesday. US interest rate swap spreads narrowed in tandem with the retreat in bond yields.