Bonds rise as European concerns 'simmer'

NEW YORK (CNNMoney.com) -- Investors returned from a holiday weekend with a gloomier outlook on the economy, thanks to an old concern that won't seem to die -- the health of European banks.

An analysis in Tuesday's Wall Street Journal said Europe's stress tests, meant to measure the health of the continent's financial sector, understated major banks' holdings of government debt.

Those renewed concerns about overseas banks pushed Treasury prices higher Tuesday, snapping three straight sessions of decline.

"We can't seem to break from simmering concerns over Europe's banking sector," said Kim Rupert, fixed income analyst at Action Economics. "It's sending people back into safe-haven Treasurys."

The yield on the benchmark 10-year note fell to 2.6%, down from 2.7% Friday. Bond prices and yields move in opposite directions. The Treasury market was closed Monday in observance of Labor Day.

The yield on the 5-year note eased to 1.41%, the 30-year bond fell to 3.66% and the 2-year note slid to 0.49%.

Bond prices have soared this summer on concerns about a double-dip recession, with the yield on the 10-year Treasury note falling as low as 2.47% last month from 3% at the end of July.

Better-than-expected data on jobs and housing offered a sliver of hope about the economy late last week, with Treasury prices falling Wednesday through Friday.

The sell-off in the bond market was "a bit overdone" Friday, Rupert said, after the government released its monthly unemployment report.

The report showed private-sector businesses added 67,000 jobs to their payrolls in August, which was higher than the 44,000 forecasted. The unemployment rate rose to 9.6% in the month from 9.5% in July, matching expectations.

Rupert expects Treasurys to be "pretty range-bound" over the next few weeks as investors digest a "terrible July and not-so-bad August." But the federal government's efforts to bolster the economy, including the homebuyer tax credit that expired in April, make comparisons to last year's situation difficult.

"We've had a lot of noise within the data thanks to these government interventions," Rupert said. "It's been tough to find clean economic data."

Moving forward, investors are looking to a $33 billion auction of 3-year Treasury notes later Tuesday. The government will also sell $21 billion in 10-year notes and $13 billion in 30-year bonds later in the week.