U.S. Treasurys prices rose on Tuesday as some traders bought long-dated debt to resell to the Federal Reserve after the central bank's latest purchase for a bond program aimed at lowering interest rates and helping the economy.
Slight losses in Wall Street stocks, after bigger losses on Monday, also fed moderate safe-haven demand for U.S. government debt, traders said.
"You have the Fed buyback and stocks are a little weaker," said Thomas Roth, a senior Treasurys trader at Mitsubishi UFJ Securities USA in New York.
Primary dealers submitted a smaller-than-usual $4.047 billion in bonds for the U.S. central bank to buy. The Fed's subsequent $1.837 billion purchase of Treasurys maturing February 2036 to November 2042 caused these dealers, who do business directly with the Fed, to scramble for longer-dated issues on the open market, traders and analysts said.
Even with Tuesday's moderate gains, the bond market held to its recent trading range as most investors remained sidelined before the year-end and with no obvious progress in Washington to avert a set of automatic tax increases and spending cuts that could further depress already slow U.S. economic growth. (Read More: Republicans Reject Tax Hike, Push Cuts in 'Fiscal Cliff' Offer)
Competition from corporate bond supply and some early preparation for next week's federal debt sales mitigated concerns about the federal budget talks, analysts said.
"When things are drifting like this, we see some money gravitating to investment-grade corporate bonds," said Jim Vogel, interest rate strategist with FTN Financial in Memphis, Tennessee.
With Treasury yields deliberately kept low by the Fed, investors reach for more yield in riskier assets such as investment grade corporate debt and lower-rated high-yield bonds.
Analysts expected companies to sell $25 billion in debt this week, according to IFR, a unit of Thomson Reuters.
In afternoon trading, benchmark 10-year Treasury notes were up 3/32, their yields easing less than a quarter of a basis point to 1.606 percent from 1.625 percent late on Monday.
The 10-year yield has found chart support at its 100-day moving average at 1.65 percent, according to Reuters data.
Wall Street stocks were narrowly lower in afternoon trading on Tuesday after opening flat.
Bond prices erased initial losses tied to news that Greece received better-than-expected terms for its debt buyback, which stoked hopes it would continue to get financial help to avoid a chaotic default and worsen the region's debt crisis.
Treasurys have moved in a tight range since the U.S. presidential election nearly a month ago.
Traders are mindful of the so-called "fiscal cliff," a series of tax increases and spending cuts worth $600 billion in the new year unless the White House and Congress devise a mutually acceptable alternative.
On Tuesday, Republican leaders kicked two of the most conservative members off the House Budget Committee, which was perceived as a move to advance a deal with Democrats to cut the federal deficit.
Jeff Given, portfolio manager at Manulife Asset Management in Boston, seemed disinclined to place positions based on the possible outcome of the political debate in Washington.
"It's all guesswork anyway. Why do you want to stick your neck out?" he said.
Evidence of this caution was reinforced by J.P. Morgan's latest Treasurys survey, which showed 70 percent of the firm's clients were "neutral" or holding Treasurys equal to their portfolio benchmarks on Monday.
Traders also tend to balance positions going into the year-end.
Fed Seen Buying More Bonds
The recession risks posed by broad-based tax rises and spending cuts would only reinforce the Fed's policy of keeping interest rates low. That would favor Treasurys, biasing them toward higher prices and lower yields. That means any selling of Treasurys is likely to be half-hearted.
"We look at the output gap and the gap between inflation and the unemployment rate and, certainly, for next year we can expect the same accommodative Fed policy," said Steve Van Order, fixed-income strategist at Bethesda, Md.-based Calvert Investments with $12 billion in assets under management. "The market reflects that and volatility is down."
Fed policy-makers will meet next Tuesday and Wednesday, where they are widely expected to decide whether to pursue further bond purchases.
The Fed has been buying a combined $85 billion in Treasurys and mortgage-backed securities a month. Its Treasurys purchases have been linked to "Operation Twist," which expires at the end of December. The operation involves the sale of short-dated debt and buying of longer-dated issues on the open market.
Short-term Treasury rates remained low, anchored by the Fed's near zero interest-rate policy. General collateral repo rates were firm overnight after last week's Treasury auctions settled on Monday. Some large repo plays are starting in connection with next week's auction of re-opened 10-year Treasury notes, the terms of which will be announced on Thursday, said Roseanne Briggen, analyst at IFR, a Thomson Reuters unit.