NEW YORK (CNN/Money) - Treasury prices reversed their morning slide on market rumors that the federal government will soon raise its national "terror alert" warning, and the dollar fell sharply after a rally versus the yen.

In a choppy trading session punctuated by some unwinding of technical interest rate bets, word that the color-coded attack warning might be raised to orange, its second-highest level, shifted prices more decisively into positive territory.

At around 4:00 p.m. ET, the benchmark 10-year note picked up 23/32 of a point in price to 99-2/32, yielding 4.37 percent, compared with 4.49 percent late Monday afternoon. The 30-year bond added 1-11/32 points to 101-24/32, lowering its yield to 5.25 percent from 5.36 percent late afternoon Monday.

The five-year note gained 12/32 of a point to 99-31/32, yielding 3.25 percent. The two-year note rose 4/32 of a point in price to 99-16/32, yielding 1.76 percent.

"I'm hearing the terror alert might have just been upgraded, from yellow to orange," Woody Garavente, a trader at Nomura Securities, told Reuters. "The market's gotten wind of that."

A spokesman for the U.S. Department of Homeland Security told Reuters the agency had no plans to raise the national threat level at this time. An explosion at the U.N. headquarters in Baghdad on Tuesday killed at least 14 -- including top U.N. envoy to Iraq Sergio Vieira de Mello -- and prompted an early safe-haven bid for Treasurys.

Treasurys have been falling for the last few weeks because of fears that the improving economic news will mean higher interest rates. Bond investors don't like this scenario, as it would erode long-term investments.

Recent economic indicators have been more than strong enough to leave analysts looking for an acceleration in economic growth, even with the hit from last week's blackout.

The dollar had been on a tear as of late, hitting 3-1/2 month highs versus the euro on Monday before retreating. International investors have been responding to increasingly positive U.S. economic data and mostly lackluster reports from different European nations, both of which made the greenback more appealing.

But around 4:00 p.m. ET, the dollar bought ¥118.27, down from ¥119.47 late afternoon Monday, while the euro bought $1.1139, down from $1.1152 late Monday afternoon.

An early morning report showing the strength in the housing market continuing to hold up, despite the recent rise in interest rates, didn't do much to sustain the dollar's early strength.

Construction starts on new homes in the United States rose 1.5 percent to a seasonally adjusted annual rate of 1.87 million units after rising a revised 5.7 percent in June. Economists, on average, expected housing starts to fall to a 1.79 million-unit pace, according to Reuters.

Building permits fell 2.4 percent in July to an annual rate of 1.78 million units from a revised 1.82 million in June, when economists expected permits to fall to a 1.8 million-unit rate.

The University of Michigan consumer sentiment survey for August, released mid-morning, dipped slightly to 90.2 from 90.9 in July, when analysts had looked for a nudge up to 91.0. Still, the softness was not much of a surprise, given the lackluster labor market, and had scant impact on currency trading.