Treasurys Fall, Then Rise On ECB

Treasury bonds clawed back losses, as the European Central Bank deflated some hopes of new measures to combat the euro zone's sovereign debt crisis.

The benchmark 10-year note added 2/32 in midday trade to yield 1.810%. The 30-year bond gained 8/32 to yield 2.924%. Bond prices move inversely to their yields.

Investors flew out of safe-haven Treasury bonds during Asian and European sessions on a report from German news magazine Der Spiegel over the weekend that the ECB could buy sovereign bonds should their yields breach certain high levels. Yet the ECB poured cold water on the idea on Monday. In a statement, the central bank said the magazine was "absolutely misleading to report on decisions, which have not yet been taken." The bank added that it is also "wrong to speculate on the shape of future ECB interventions" and that monetary policy is "independent and undertaken strictly" within its mandate.

"There is obviously a lot of confusion," said Anthony Cronin, a Treasury bond trader at Societe Generale SA in London.

In recent weeks, optimism has risen that the ECB would roll out a new plan from its monetary policy meeting in early September, which had been a major factor encouraging investors to dump Treasurys and embrace stocks. Should the ECB announce new initiatives next month to reassure investors, Treasury bonds might lose their luster compared with stocks, traders said. The flip side will be that the ECB disappoints investors and Treasury bonds might rally again, traders said.

Another major factor to shape Treasury yield outlook is U.S. economic reports including the August nonfarm jobs report due early September.

Some encouraging data over the past several weeks have dented speculation that the Federal Reserve would embark on a new bond-buying program from its monetary policy meeting between Sept. 12-13. That had pushed Treasury bond bulls to reduce their bond holdings.

More upbeat data to show U.S. growth would improve from a dismal second quarter would further dilute calls for the Fed to do quantitative easing stimulus in the near term, and Treasury bonds could sell off more.