Treasurys tumbled on Tuesday as upbeat consumer spending data lowered demand for U.S. debt, pushing the two-year note yield to its highest level since 2011.
The two-year note yield hit a session high of 0.815 percent, its highest level since 2011, according to FactSet data. The three-year note yield rose to its highest in more than two years at 1.122 percent, according to Reuters. The benchmark 10-year Treasury yield increased 8 basis points to 2.27 percent, a session high. When a bond yield falls, the price rises.
Strategists said the August retail sales report, along with the idea that the Fed may pass on an interest rate hike at Thursday's meeting helped to push investors away from safer assets such as Treasurys. U.S. stocks rose 1 percent, with the Dow adding more than 200 points.
"There is some unusual market action in the short end of the Treasury yield curve today," said Peter Boockvar, chief market analyst at the Lindsey Group. "I'm hearing that there is unwinding of steepening trades and there very well could be positioning shifts ahead of Thursday. These moves are sharp and we can only assume the violent moves we'll see if the Fed actually raises rates."
U.S. August retail sales data for August rose 0.2 percent, slightly below the expected 0.3 percent growth, while July's figures were revised upward. Separately, the Empire State manufacturing survey showed activity in the region declined more than expected.
Read MoreLast look at consumer before Fed meets
The data comes just a day before the Federal Reserve kicks off a highly anticipated policy meeting where it could decide to raise benchmark interest rates for the first time in more than nine years.
Treasurys
Investors are plainly split on whether the Fed will increase rates at its two-day policy meeting this week, with some saying the recent market volatility could be enough to sideline the central bank for several months or more.
The Fed funds futures rate, a gauge of when Wall Street expects the Fed to lift off, indicates a 25 percent likelihood that the central bank will boost rates this month, compared with a 45 percent chance a month ago.
"[T]he Fed is not known for beginning a normalization of policy rates when the market has just experienced in essence a tightening via wider credit spreads and a dislocated equity market," said Jennifer Vail, chief investment officer of Institutional and Corporate Trust at U.S. Bank Wealth Management.
Traders expect the short end of the yield curve to rise further if the Fed moves to raise interest rates Thursday. Bond market volatility is moving closer to average, but "we're a long way from normal trading," Vail said.
Even with major economic releases on the calendar this session, analysts said they expected trade in the U.S. government bond market to be range bound in the run up to Thursday's Fed rate decision.
"The waiting game will go on until the Fed delivers its verdict on Thursday," analysts at Societe Generale said in a note.
"Our economists are looking for solid U.S. retail sales for August but a weak industrial production report today," they said. "That's probably not good enough to support the case for a hike, though the key issues are how much weight to give to the global downturn and financial market volatility."