U.S. Treasurys prices rose on Wednesday due to strong investor demand at a $21 billion auction of 10-year notes, part of this week's $65 billion supply of coupon-bearing government debt.
Bond prices earlier rebounded from Tuesday's losses as dealers bought Treasurys to exit hedges linked to Verizon's record-setting corporate bond deal they underwrote. This interest rate hedge buying faded after the Verizon deal priced.
The market was also supported by the Federal Reserve buying $1.50 billion in Treasurys that mature in 2038 to 2043, which was part of its ongoing purchase program, known as QE3.
The 10-year note auction was "incredibly strong at a cheap level. There was fairly aggressive bidding," said Aaron Kohli, an interest rate strategist at BNP Paribas in New York.
The latest 10-year supply, which was added to an issue originally sold in August, cleared at a yield of 2.946 percent, which was the highest level since June 2011. The latest 10-year auction yield was nearly 33 basis points above the level set last month.
"The 10-year note auction was good," said Peter Boockvar of The Lindsey Group in a note. Apart from Syria, the next FOMC meeting is in focus, he said.
"We will likely get a taper but only $10-15 billion," Boockvar said. The sharp increase in the interest rates over the past few month show that the Fed move is already priced in and "the good auction result today reflects that," he said.
The 10-year Treasurys sale occurred about an hour after Verizon sold a $49 billion multi-part bond offering, whose size eclipsed the previous record of $17 billion by Apple in April, according to IFR, a Thomson Reuters service.
The $11 billion 10-year fixed-rate tranche of the Verizon deal was sold at a yield of 5.192 percent, about 2.25 percentage points above the 10-year Treasurys yield.
In the so-called "gray" market, the yield spreads of the Verizon bonds over Treasurys narrowed 50 basis points versus their pricing levels, according to traders and analysts.
The strong demand at the 10-year auction and the Verizon deal signaled investors might feel comfortable to buy bonds at current yield levels ahead of the Federal Reserve's policy meeting next week, when it might decide to pare its $85 billion monthly bond purchases.
"The likelihood of the Fed tapering has been well telegraphed and very well priced into the market. While it's unclear what the Fed will do next week, tapering should not spook the market," said Jake Lowery, portfolio manager at ING U.S. Investment Management in Atlanta.
Economists told Reuters after the latest jobs report, they now expect the Fed to begin paring its purchases of Treasuries and mortgage-backed securities by $10 billion a month, down from the $15 billion median in Friday's primary dealer poll and a wider poll in August.
On the open market, benchmark 10-year notes last traded 14/32 higher in price for a yield of 2.912 percent, down about 5 basis points from late on Tuesday and 10 basis points below the 25-month high set on Friday.
The 30-year bond rose 23/32 in price with a yield of 3.851 percent, down 4 basis points from Tuesday's close, while the two-year note edged up 1/32, yielding 0.447 percent, down 2 basis points from Tuesday.
In the aftermath of a strong 10-year auction and a blockbuster Verizon deal, traders and analysts were uncertain whether investors would bid aggressively for Thursday's $13 billion in 30-year Treasury bond supply.
"It's not a screaming buy like the 10-year," said BNP's Kohli.
In "when-issued" activity, traders expected the reopening of the 30-year bond issue to clear at a yield of 3.860 percent, higher than 3.652 percent when it was initially sold in August.
—By CNBC with Reuters.