Prices fell overnight after Moody's Investors Service affirmed Spain at the lowest investment grade rating, giving a reprieve from a downgrade that would have driven its debt out of some bond indexes and prompted selling by investors who track them.
Losses by Treasuries accelerated after data showing groundbreaking on new US homes surged in September to its fastest pace in more than four years, another sign that the housing sector's budding recovery may be strengthening.
"Bond investors are admitting that the economic data is getting better and that the economy could grow near 2 percent in the fourth quarter," said Tom di Galoma, managing director at Navigate Advisors LLC in Stamford, Connecticut.
Benchmark 10-year notes traded 24/32 lower in price to yield 1.80 percent, the highest since Sept. 19 and up from 1.72 percent late Tuesday. Benchmark yields were on track for the biggest two-day rise since late July.
The yields were nearing their 200-day moving average, di Galoma noted, and are widely expected to bounce off that level near 1.81 percent.
Thirty-year bonds traded 1-9/32 lower in price to yield 2.98 percent, up from 2.92 percent late Tuesday.
The data is the latest sign that the US housing market is turning and further improvement should help boost the economy, and send longer-dated Treasuries yields higher, said Wilmer Stith, who helps manage that $300 million Wilmington Broad Market Bond Fund in Baltimore, Maryland.
Mortgage purchases made by the Federal Reserve as part of its third quantitative easing program should help drive down borrowing rates further, and more economic improvement is likely once uncertainty around November's presidential election and the fiscal cliff pass.
"If businesses start to feel more confident once the political clouds are past we will see long term interest rates start to rise as inflation rises, and as the economy starts to improve," he said.
Stith said he is overweight the five- to seven-year notes, which he says offer the best risk-adjusted returns, and sees longer-dated debt as most at risk of yield increases.
Two-year swap spreads also continued to tighten on Wednesday, likely reflecting an uptick in lending as investors search for higher-yielding assets due to the very low interest rate environment.
The two-year swaps spread tightened by over a half a basis point to 8.5 basis points.