Treasuries began the day trading lower in price after ECB President Mario Draghi was quoted as telling lawmakers that ECB purchases of debt with a maturity of up to three years would not breach the European Union's taboo of directly financing economies.
Price losses were pared however following data from the Institute for Supply Management that showed the US manufacturing sector shrank at its sharpest clip in more than three years in August.
"It has become increasingly clear that the manufacturing sector is losing momentum. This soft (ISM) report leading into Friday's payrolls will only solidify additional action from the Fed if we see another soft jobs report," said Tom Porcelli, chief US economist at RBC Capital Markets in New York.
Treasuries rallied on Friday after Federal Reserve Chairman Ben Bernanke buoyed expectations of a new round of bond-buying stimulus for the struggling US economy.
Economic data this week was expected to be key to whether those expectations gain traction and provide momentum for a fresh safe-haven rally in Treasury debt.
The ISM manufacturing survey for August bolstered Treasuries' safe-haven appeal but the main focus will fall on Friday's nonfarm payrolls report after Bernanke explicitly expressed concerns over the labor market on Friday.
Benchmark 10-year Treasury notes on Tuesday were trading 6/32 lower in price to yield 1.57 percent, up from 1.55 percent late Friday, while 30-year bonds were 7/32 lower to yield 2.68 percent from 2.67 percent.
Prices eased as "investors play a financial version of tug-of-war, driving prices up and down depending on what the Fed is saying and what the ECB may or may not be doing," said Kevin Giddis, head of fixed income capital markets at Morgan Keegan in Memphis, Tennessee.
Giddis sees Friday's payrolls data as key to any Fed decision on whether they will follow through with a third round of bond purchases, known as quantitative easing or QE3.
"In my opinion, this is the number that creates a 'go/no go' decision from the Fed on QE3," he said, adding "the market seems to be hedging itself a bit by trading the 10-year note yield on either side of the 1.69 percent area. My guess is, by Friday, we will blow through that level, either pushing 1.25 percent or 1.75 percent in the process."
While Draghi's comments gave investors some cause for optimism over the outlook for Europe's credit crisis, the overall picture for the euro zone remained murky.
Moody's Investors Service changed its outlook on the Aaa rating of the European Union to negative, warning it might downgrade the bloc if it decides to cut the ratings on the EU's four biggest budget backers: Germany, France, Britain and the Netherlands.
The move will add to pressure on the ECB to provide details of a new debt-buying program to help deeply indebted euro zone states at its policy meeting on Thursday.