NEW YORK (CNN/Money) - Treasurys clawed back from early losses to edge ahead Wednesday, as speculators took profits on short positions, though a deeply gloomy market sentiment persisted.

Benchmark 10-year yields briefly extended their meteoric rise of Tuesday to hit four-month highs above 4.00 percent, as prices soured due to Fed Chairman Alan Greenspan's remarks to Congress.

Meanwhile, the dollar rallied against the yen, but took a hit versus the euro, after a reading showed an expected rise in consumer prices.

Just before 4:00 p.m. ET, the European currency bought $1.1209, up from $1.1185 late Tuesday afternoon. The dollar bought ¥118.18, up from ¥117.89 late afternoon Tuesday.

The benchmark 10-year note gained 15/32 of a point in price to 97-19/32 for a yield of 3.92 percent, down slightly from 3.94 percent late Tuesday afternoon. The 30-year bond rose 36/32 points to 107-6/32 with a yield of 4.89 percent versus 4.93 percent late afternoon Tuesday.

The five-year note rose 7/32 of a point in price to 99-13/32 with a yield of 2.76 percent, and the two-year note gained 1/32 of a point in price to 99-12/32 with a yield of 1.44 percent. Bond prices and yields move in opposite directions.

"There's no doubt that we're dealing with the hangover of Chairman Greenspan's speech yesterday," said Kevin Flannigan, bond market strategist at Morgan Stanley.

The bond market was less than pleased that the Fed chairman, in his semiannual report to Congress Tuesday, said he thought situations requiring unusual policy action were unlikely to arise. Traders have been hoping the danger of deflation would push the Fed into unconventional measures such as outright purchases of longer-term Treasurys.

Traders said it was unlikely that Greenspan would refute any points made Tuesday, which could change direction of the market, in his continued remarks to Congress on Wednesday.

On the economic front, the government said its consumer price index for June rose 0.2 percent, compared with a flat reading in May and in line with economists' average estimate, according to a survey by Briefing.com. Excluding food and energy, prices were flat, compared with a forecasted rise of 0.1 percent.

Traders said that with deflation looking more and more unlikely, bond yields are likely to continue higher as investors refocus on the fundamentals. After rallying for months, bond prices have begun to fall in recent weeks.

"Sentiment has changed and the path of least resistance is for yields to edge higher," Flannigan added.

Figures on industrial output were in line with expectations and had scant effect. Production rose 0.1 percent in June while capacity utilization stayed at a historically low 74.3 percent, underlining how much slack the economy would have to use up before inflation became a danger.

But all that mattered little to a market still traumatized by Tuesday's savage selloff sparked by very bullish economic forecasts from the Federal Reserve.

"These numbers are going to give the Fed some comfort that it can keep rates low for a while, but I don't think it's going to give the bond market much comfort right now," Joe LaVorgna, senior U.S. economist at Deutsche Bank Securities, told Reuters. "It's not like numbers don't matter, it's just that the bond market is in a bad technical stage because the move yesterday was so violent that it has implications for today."  

-- Reuters contributed to this report.