Treasury Prices Get Late-Session Lift

Merrill, which will release results Wednesday, already said it will take a massive $5.5 billion writedown for sour fixed-income assets. However, there were rumors in Treasury trading pits Tuesday that the real impact will be anywhere from $6 billion to $14 billion, according to T.J. Marta, fixed-income analyst at RBC Capital Markets.

"There is a lot of concern about Merrill Lynch and it weighed on yields," he said. Normally the bond market is indifferent to corporate earnings. But this week, investors are pouring through bank sector results looking for clues about the severity of debt problems; as they worry, they've been seeking the safety of government-backed securities.

Meanwhile, a regional Federal Reserve survey showed that manufacturing in the Central Atlantic states declined this month, halting a four-month period of expansion. The Richmond Federal Reserve's October factory survey had a minus-5 reading, down from 14 in September.

The Richmond Fed survey is not always influential in the market, but Marta said the sign of economic slowing helped spur the late-session buying of low-risk Treasurys.

The benchmark 10-year Treasury rose 2/32 to 102 23/32 with a yield of 4.40 percent, matching its closing price on Monday.

The 30-year long bond finished unchanged at 104 29/32 with a 4.69 percent yield, against 4.68 percent late Monday.

The 2-year note gained 2/32 to 100 11/32 with a 3.81 percent yield, down from 3.83 percent at Monday's close.

After-hours trading sent some yields a touch higher. At 5.30 p.m. EDT the 10-year yield rose to 4.41 percent from 4.40 percent as the 30-year yield advanced to 4.70 percent from 4.69 percent; the 2-year yield remained at 3.81 percent.

The yield on the 3-month Treasury bill ended at 3.99 percent, matching its closing level on Monday, and the discount rate remained at 3.89 percent.

Throughout most of the session Treasury prices were pressured by a rebound in the stock market, following heavy selling last week. There also were concerns about excess supply as new issues come to market.

The Treasury Department Tuesday auctioned off $6 billion in Treasury Inflation Protected Securities, which provide a cushion against inflation. The department will hold auctions of standard two- and five-year notes on Wednesday and Thursday.

The latest auction results were somewhat lackluster, with a fairly high ratio of bids made to bids accepted but a low volume of foreign bids. Bids from outside the U.S. are closely watched because there are worries foreign central banks will diversify out of dollar-based assets.

The inflation bonds were less attractive because worries about rising prices are easing, according to Action Economics. Investors' worries about inflation were eased by a decline in the crude oil futures prices Tuesday.

Overall, Treasurys in October have rallied amid worries that souring below prime mortgages and other housing problems will wreak damage on the broader economy and motivate the Fed to cut rates again.

The Fed's monetary policy committee, which cut rates by a full half percentage point in September, will meet again next week. Currently, bond market participants are expecting a quarter point percentage point rate cut, but some are speculating there will be another half percentage point decrease.