Treasurys fall on rate cut, bank earnings

NEW YORK (CNNMoney.com) -- Bond prices fluctuated Tuesday after the Federal Reserve cut interest rates and surprisingly strong earnings from Wall Street banks coaxed investors back into the stock market.

The central bank lowered the fed funds rate, a key overnight bank lending rate, by three-quarters of a percentage point to 2.25%. The Fed has already slashed the fed funds rate by 2.25 percentage points since September to help stabilize the economy and ease conditions in the credit market.

Bonds were lower throughout the session Tuesday as stocks rallied. Shortly after the Fed's announcement, stocks trimmed gains as some investors were expecting a more dramatic rate cut, and bond prices rose modestly in response. Since then, bond prices have eased.

Earlier Tuesday, investment banks Lehman Brothers (LEH, Fortune 500) and Goldman Sachs (GS, Fortune 500) both reported earnings that beat Wall Street estimates, sending stocks sharply higher. The rally comes just one day after Bear Stearns (BSC, Fortune 500) shocked investors by agreeing to be sold to rival JP Morgan Chase (JPM, Fortune 500) for $2 a share.

Bears' dramatic fall raised fears Monday that the financial system was in serious danger. But the stronger-than-expected results from Goldman and Lehman helped to ease some of the concerns about the health of the financial services sector.

Investors tend to favor the security of government-backed bonds in times of economic uncertainty. Conversely, when there are signs that the economic climate is improving, investors prefer stocks.

The benchmark 10-year Treasury note fell 1 11/32 to 100 9/32 with a yield of 3.46%, up from 3.30% late Monday. Prices and yields move in opposite directions.

The 30-year long bond lost 1 7/32 to 100 12/32 with a yield of 4.35%, up from 4.28% late Monday.

The 2-year note dropped 13/32 to 100 26/32 with a yield of 1.57%, up from 1.35%.

Elsewhere, the government said Tuesday that initial construction of new homes fell in February, though by a smaller number than expected. Still, the housing report showed further decline in the number of single-family homes, which analysts say are the core of the housing market, undergoing initial construction in February.

The Labor Department's Producer Price Index (PPI), a key measure of inflation at the wholesale level, rose as expected in February. But core PPI, which strips out volatile food and energy prices, came in higher than expected.