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Treasury Department auctions $26 billion of 2-year notes at a high yield of 0.648%

Traders in the 10-year bond options pit at the Chicago Board of Trade signal orders.
Frank Polich | Reuters
Traders in the 10-year bond options pit at the Chicago Board of Trade signal orders.

Bond yields tumbled on Tuesday after the U.S. government's auction of 2-year Treasury notes drew average demand.

The Treasury Department auctioned $26 billion in two-year notes at a high yield of 0.648 percent, the highest since December. The bid-to-cover ratio, an indicator of demand, was 3.40, compared to a recent average of 3.42.

Two-year Treasury notes were last down slightly in price to yield 0.627 percent, from a yield of 0.63 percent late on Friday. Benchmark 10-year Treasury note yields were at 2.14 percent, from a yield of 2.23 percent late on Friday.

Indirect bidders, which include major central banks, were awarded 42.3 percent, above the 40 percent average. Direct bidders, which includes domestic money managers, brought 17.2 percent, versus a recent average of 14 percent.

Short-dated U.S. Treasury yields hit two-week highs earlier on continued expectations that the Federal Reserve would hike rates this year, while yields on longer-dated Treasurys slid on concerns over Greece and global economic growth.

U.S. two- and three-year yields, which are sensitive to expectations on when the Fed will hike rates, hit two-week highs of 0.65 percent and 1.03 percent, respectively, after traders took a sanguine view of U.S. durable goods orders data.

Commerce Department data showed U.S. durable goods order slipped 0.5 percent in April, in line with economists' expectations according to a Reuters poll, but were revised higher to 5.1 percent for March. In addition, U.S. business investment spending plans increased solidly for a second straight month, the data showed.

Symbol
Yield
 
Change
%Change
US 3-MO
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US 1-YR
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US 2-YR
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US 5-YR
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US 10-YR
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US 30-YR
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"I viewed it as a fairly economy-friendly report," said Justin Hoogendoorn, fixed income strategist at BMO Capital Markets in Chicago. He said the data gave the Fed more room to be less accommodative.

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After hitting two-week highs, yields on short-dated notes stabilized a bit, which Hoogendoorn attributed to expectations that the pace of Fed rate increases will be gradual.

"People just don't think the strength in the economy is there to sell off hard, the Fed's going to have to be extremely slow and gradual," Hoogendoorn said.

He said concerns over the impact of a stronger U.S. dollar on the U.S. economy and global economic weakness were boosting prices of 30-year Treasurys, whose yields held near eight-day lows touched early in the session. Bond prices move inversely to yields.

Worries over a possible Greek debt default also contributed to the price gains in 30-year Treasurys. Greece has to repay the International Monetary Fund 300 million euros on June 5, the first of four installments due in June that total 1.6 billion euros.

"They're coming up on the June deadline," said Jonathan Rick, interest rate derivatives strategist at Credit Agricole in New York.

U.S. 30-year Treasurys yields were at 2.90 percent, from a yield of 3 percent late on Friday and near the eight-day low of 2.938 percent touched earlier.

—CNBC contributed to this report.