Treasurys gain momentum

Early look at the markets

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NEW YORK (CNNMoney.com) -- Government bond prices gained steam throughout the day Wednesday as stocks sold off for the second session in a row, amid weak earnings reports, dour housing-market news and soaring oil prices.

The benchmark 10-year note rose 17/32 to 97 28/32, and its yield fell to 4.14% from 4.20% late Tuesday. The 30-year long bond rose 26/32 to 94 18/32, and yielded 4.72%, down from 4.77% late Tuesday.

The 2-year note rose 5/32 to 99 19/32, and yielded 2.86%, down from 2.91% late Tuesday.

Stocks slid early Wednesday as Morgan Stanley (MS, Fortune 500) and FedEx (FDX, Fortune 500) reported weak earnings for the second quarter, and a report on the housing sector showed mortgage refinancing reached a low for 2008.

Later in the day, the Dow Jones industrial average briefly dipped below 12,000 points as oil prices spiked above $136, after a mixed inventory report.

"When financials are taking a beating, Treasurys tend to do well," said Steve Van Order, chief fixed-income strategist for Calvert Funds. Pessimism about the stock market tends to lure investors into the perceived safety of the government bonds market, said Van Order.

Bonds rose Tuesday amid expectations that the Federal Reserve would raise its key funds rate in an effort to stem the tide of inflation. However, rumors have mounted in the past few days that Fed chief Ben Bernanke will hold rates steady.

If those rumors gain more steam, that could mean a future selloff of bonds, said Peter Cardillo, Avalon Partners chief market economist.

"There's a scaling back in thinking that they'll raise rates," he said. "The bond market priced in a quicker rate-raising phase than what the Fed is signaling."

The 2-year note tends to be the most sensitive to interest rate changes. If rates climb and boost Treasury yields, the notes bought prior to the rate hike will have less-attractive yields.