NEW YORK (CNNfn) - Treasury markets recovered their upward momentum Tuesday as a morning stock rally gave way, while the dollar continued to take advantage of favorable news from Japan.
By 3:00 p.m. ET, the benchmark 30-year Treasury bond was trading at its session high, up 1-7/32 points at 98-21/32, while the yield fell back to 5.33 percent.
Two-year notes were unchanged at 99-7/32, yielding 4.91 percent.
Traders said the bond market was building on both Wall Street's sudden bout of trepidation and lingering enthusiasm about an overnight rebound in the Japanese bond market.
Despite starting strong, U.S. stocks wavered as bargain-hunting sentiments evaporated, giving up the bulk of their gains by late afternoon.
As a result, some nervous investors sank their capital back into the bond market, which had seen morning gains erode but not fully disappear in the face of Wall Street's early progress.
Short-covering was also a factor, as investors snapped up stocks to make up for Friday's dramatic bond retreat.
"After last week's sell-off a lot of people were caught underwater on positions," said Mike Cloherty, bond market strategist at CS First Boston. "So after the market's bounce this morning, traders took it as an opportunity to lighten up on their positions . . . to buy back on some of their loss incurred Friday."
Despite this, some traders noted that buying volume was light, exaggerating the seeming magnitude of the rally.
Analysts were likewise wary of the bond market's ability to sustain its balance.
"The Treasury market rally may be a bear trap," said Anthony Crescenzi, chief bond analyst at Miller Tabak Hirsch. "The rally lacks a strong foundation as well as the extreme pessimism that marks the end of sell-offs."
Crescenzi remains bearish on the Treasury market, warning investors to sell bonds until the economy slows or stocks fall.
Dollar still climbing
The dollar also resumed its morning surge after drifting slightly from its early highs during the day, lending additional support to the Treasury market.
"The fluctuations in the bond market are all dollar-related," said Scott Graham, co-head of government trading at Prudential Securities. "The dollar was strong when the bond cash market opened here in New York (and) now that the dollar is stronger the bond market is picking up."
Currency traders said the greenback owed its most recent gains to indications that Japan will halt its currency intervention activities in the near term, allowing the yen to fall further against other currencies.
By 3:00 p.m. ET, the dollar was testing the 119-yen level at 118.77 yen, pushing into increasingly heady 10-week record territory. The greenback had closed at 114.04 yen in New York Friday.
Meanwhile, the euro recovered from its all-time lows to trade at $1.1207, up narrowly from its record trough of $1.1158 hit overnight.