U.S. Treasury debt prices fell Tuesday, with benchmark yields rising to the highest in three weeks as concerns about looming new debt supply again took its toll, particularly on the longer end of the Treasury curve.

Some optimism over a massive stimulus package from the incoming Obama administration also had investors willing to take on more risk, giving stocks a bit of a boost and reducing the safe-haven appeal of government debt.

Bond Yields

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Paying for the incoming government's stimulus plan is expected to dramatically boost the amount of debt issued by the government.

"You are hearing more and more about ... the unprecedented avalanche of supply that we are going to get this year," said Josh Stiles, bond strategist at IDEAglobal in New York. "We are getting into that new trade, where we are actually going to feel the supply hit."

Benchmark 10-year Treasury notes were trading 21/32 lower in price for a yield of 2.55 percent compared with 2.48 percent late Monday. The benchmark yield, which trades inversely to prices, reached to as high as 2.61 percent on Tuesday, marking the highest since mid-December.

The two-year note was trading 4/32 lower with its yield rising to 0.84 percent from 0.78 percent.

Bonds trimmed some losses Tuesday morning after weaker-than-forecast data on factory orders and pending home sales. The evidence of further deterioration in the economy was somewhat offset by data showing that the service sector contracted less severely than expected last month.

"The (Institute for Supply Management) services index kind of offset factory orders," Stiles said.

The Treasury is set to auction $166 billion of debt this week alone, including $8 billion of new 10-year Treasury Inflation Protected Securities, or TIPS, Tuesday.

Debt issuance is ramping up to help pay for all of the various economic rescue programs from the government. However, the supply will heavily dilute the market, and with yields still not far above the lows reached in mid-December, investors said Treasury debt prices were taking a hit.

"Treasurys are still being driven lower this morning on Obama's proposed $775 billion stimulus package and massive supply that will result," said Tom di Galoma, Treasurys strategist at Jefferies in New York.

Later Tuesday, the release of minutes from the Federal Open Market Committee's December policy meeting should also garner attention.

At the conclusion of that two-day meeting the FOMC lowered target overnight lending rates between banks to a range of zero to 0.25 percent from the previous target rate of 1.00 percent.

Five-year Treasury notes were trading 9/32 lower for a yield of 1.74 percent from 1.67 percent late Monday, while the 30-year bond was trading 1-20/32 lower for a yield of 3.10 percent from 3.03 percent.

Monday marked the first time the long bond yield had finished above 3.00 percent since the middle of December.

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