(Bloomberg) -- Treasuries rose after the first batch of this week's US economic reports was weaker than expected, with gains extending amid hefty buying of bullish options targeting a decline in the benchmark 10-year yield below 4% in the coming weeks.

Yields gravitated back toward session lows — down three to four basis points on the day — after the December ISM manufacturing gauge unexpectedly dropped. Earlier yield declines sparked by the weekend US capture of Venezuelan President Nicolás Maduro had stalled as oil prices rebounded from an initial slump.

Trading was choppy as traders began the week, in part due to a surge in sales of new corporate bonds that will compete for investor cash. That flow was offset as Treasury options activity on Monday extended this year's trend of several notable wagers on 10-year yields falling to and below 4% in the coming weeks, a level last seen in November.

A barrage of US economic data this week — culminating with Friday's December employment report — may alter the outlook for additional Federal Reserve interest-rate cuts. The Fed lowered its target band for short-term lending rates at its past three meetings in response to weakening labor-market conditions, and officials are expected to reduce it further this year.

The ISM gauge drew a "measured response, which is appropriate," said John Briggs, head of US rates strategy at Natixis North America. "Given we are only a few hours into the new year and we have the whole Venezuela situation, people may be cautious about too much risk too soon."

Meanwhile, the "more important" December jobs data "will be the first clean report we will be getting in a long time," he said. A six-week US government shutdown from Oct. 1 to Nov. 12 delayed the production of employment data for September, October and November.

The ISM manufacturing gauge and a related measure of prices paid by factories were lower than the median estimates of economists in a Bloomberg survey. The main gauge declined to 47.9, the lowest since October 2024, however a related employment index rose to 44.9 from 44.

Treasury yields had briefly pared their declines in early US trading as corporate bond issuers — on hiatus since mid-December — slated the first of the day's offerings, anticipated to total around 20. Dealers have projected about $70 billion of sales this week and a $215 billion monthly total that would set a record if reached.

The 10-year was trading near a session low around 4.15%, while the two-year was at roughly its lowest level on the day at 3.45%, relative to the Fed's target range of 3.5% to 3.75%. Money markets are pricing in two quarter-point Fed rate cuts in 2026, the first by mid-year, and around a 30% chance of a third this year.

"Even as geopolitics are once again top of mind for investors, we're reminded that this week offers an array of key fundamental updates – most of which are focused on the employment landscape," Ian Lyngen, head of US rates strategy at BMO Capital Markets, wrote in a note. This week's labor readings are "frankly, still the most relevant wild card for the US economy and monetary policy."

Strong 2025

The US bond market delivered a total return of 6.3% last year, its best annual run since 2020, but momentum faded in December amid signs of economic resilience in data and financial markets, along with rising European and Japanese government bond yields. The US 10-year yield returned to the high end of its range since early September around 4.20%.

Most government bond markets globally gained Monday as crude futures prices initially fell on the prospect of a rebound in Venezuelan production. The market was already facing a supply glut from OPEC+ and other producers.

While heightened geopolitical concerns often spur a demand for havens such as Treasuries, US stocks were higher on Monday and US cash bonds are also lagging their swap counterparts, which signals increased risk appetite.

"Geopolitical shocks historically don't tend to have much of a lasting impact," Deutsche Bank AG strategists including Henry Allen wrote in a client note. "That might seem surprising, but that's because markets generally trade on macro variables like growth and inflation, rather than geopolitical shocks per se."

--With assistance from Neil Chatterjee, Robert Brand and James Hirai.

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