Treasurys retreat as demand wanes

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NEW YORK (CNNMoney.com) -- Treasurys retreated Tuesday, with the yield on the 10-year note rising above 3%, as stocks rallied in New York.

Prices initially rose during morning trading amid speculation that the Federal Reserve would offer details about its plans to buy longer-dated Treasurys when the central bank releases its monthly policy statement Wednesday afternoon.

But support for bond prices "dissipated when the stock market went from flat to stronger," said Bill Larkin, a fixed income portfolio manager at Cabot Money Management in Boston.

Demand for U.S. bonds, which are considered one of the most secure assets available, often falls when equities rise as investors' appetite for risk outweighs the need for safety.

The stock market surged Tuesday as investors revisited last week's four-day winning streak, which had fizzled Monday. Stocks have benefited recently from better than expected economic data and upbeat comments from bank executives.

Fed: The central bank's policy-making body began a two-day meeting Tuesday and is expected to hold interest rates steady near 0% when it releases its statement at 2:15 pm. ET Wednesday.

In recent policy statements, the Fed has signaled that it would consider buying longer-term Treasurys if it would help improve conditions in the credit markets. The aim is to bring down interest rates on other types of debt that are tied to the bond market, such as some corporate debt and mortgage loans, to ease the flow of credit.

Central bankers in the U.K. announced earlier this month that the Bank of England would begin buying British government bonds, a strategy known as quantitative easing, to boost the country's money supply.

Analysts say the Fed could follow a similar path since its main weapon for combating economic weakness, interest rates, has been effectively exhausted.

Separately, the Treasury Department will announce Thursday the amount of 2-, 5- and 7-year notes to be auctioned next week. The government sold $63 billion of debt last week.

Economy: The market is also responding to government reports on inflation and the nation's housing market.

The Labor Department's producer price index increased by 0.1% last month versus a 0.8% gain in January. Economists had expected an increase of 0.4%, according to a survey conducted by Briefing.com.

Inflation gauges are closely watched by bondholders since rising prices severely undermine the value of fixed-income assets like Treasurys.

A report from the Commerce Department showed the number of new homes breaking ground in February surged 22% amid a spike in construction of multi-family buildings.

While the report raised some hopes that the market is nearing a bottom, most analysts warned the housing crisis is far from over.

Treasury prices: By late Tuesday, the benchmark 10-year note was down 15/32 at 97 25/32 and its yield rose to 3.01% from 2.96% late Monday. Bond prices and yields move in opposite directions.

The 30-year bond slid 1-6/32 to 94 6/32 and yielded 3.8%.

The 2-year note was down 3/32 to 99 22/32 with a yield of 1.04%.

The 3 month bill yielded 0.23%.

Lending rates: The 3-month Libor rate fell to 1.3% from 1.31% Monday, according to data on Bloomberg.com. The overnight Libor rate declined to 0.31% from 0.33%.

Libor, the London Interbank Offered Rate, is a daily average of rates that 16 different banks charge each other to lend money in London.

Two credit market gauges were positive. The "TED" spread held steady at 1.07 percentage points. The narrower the TED spread, the more willing investors are to take risks.

The Libor-OIS spread shrank to 1.07 percentage points from 1.08 percentage points. A narrower spread indicates that more cash is available for lending.