Bonds ping-pong in narrow range

NEW YORK (CNNMoney) -- Treasury yields are stuck in a pretty narrow trading range as investors weigh renewed optimism about the U.S. economic recovery against geopolitical tensions overseas.

Signs of a U.S. economic recovery tend to reduce demand for bonds as investors move funds into more profitable markets.

At the same time, the political upheaval in both Egypt and Libya have increased demand for Treasuries in the past month, as investors look for a safe place to park their cash.

The dueling forces have prices for Uncle Sam's debt churning, depending on the news of the moment and where sentiment is tipping.

"Treasury yields have been rising and falling depending on the mood and opinion of the world's market players," Kevin Giddis, president of Fixed Income Capital Markets at Morgan Keegan, said in a daily research note.

A Tuesday morning a report from a purchasing managers' group showed manufacturing activity in the United States climbed in February to the highest level in nearly seven years, and bond yields were slightly higher as prices dipped.

Meanwhile, in his twice-yearly testimony to Congress, Federal Reserve Chairman Ben Bernanke said that inflation will not be a major roadblock to recovery. Bernanke did acknowledge that rising commodity prices will likely be passed on to consumers, but not in a significant way, he believes. The Fed projects inflation of less than 2% for each of the next three years.

"As expected, Chairman Bernanke is downplaying the risk of inflation, citing slack and temporary conditions as the reasons why he is not all that concerned about rising prices," Keegan wrote.

Then, later in the afternoon, stocks tumbled, with all three major indexes down 1%, as oil prices jumped up towards $100 a barrel. Rising oil prices have pushed the price at the pump higher for seven days in a row.

Yields on Treasuries were slightly higher in morning trade but by the afternoon yields had dipped slightly. At the end of the session, the benchmark 10-year note was at 3.40%, the 30-year bond sat at 4.49%, the 5-year note was at 2.11% and the 2-year note was at 0.66%. Bond prices and yields move in opposite directions.

The combination of an improving U.S. economy and sustained unrest in the Middle East will keep the Treasury market bouncing around.

"The markets remain, and likely will remain, in a volatile state as long as the unrest in the Middle East continues to push oil prices higher," Keegan said. "The longer that oil prices remains elevated, the higher the chance of it affecting the recovery."

While rising oil and gas prices pose a potential threat to the economic recovery, the two cornerstones of a recovery are the housing market and the job market. Friday, the government is due to report out its latest read on the labor market.

"The U.S. economy can only go so far on optimism. Sooner or later, we need to see some progress on housing and jobs," Keegan said. "Both are likely a long ways away."