It's time for bond traders to place their bets on whether the Fed is ready to begin tapering its bond buying program.
The auction of $21 billion in reopened 10-year Treasury notes at 1 p.m. ET Wednesday could provide an indication of where market expectations line up on the Fed's timing.
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Since Friday's better-than-expected jobs report, the chances for a tapering in December have increased in the eyes of traders, though many Fed watchers still see March as more likely and January as a possibility.
CNBC's Steve Liesman Tuesday reported that a December announcement looks increasingly more likely. He pointed out that several of the Fed's own tests for reducing the $85 billion -a-month quantitative easing program look to have been met, ahead of next week's meeting. Those criteria include confidence in the outlook, an easing of fiscal drag, and what the Fed sees as more appropriate interest rates.
"The tricky part really becomes tomorrow's auction more so than the 30-year. I think it is really a test of the market's view on tapering in December, or not," said George Goncalves, head of Treasury strategy at Nomura Americas. The Treasury auctions $13 billion of 30-year bonds on Thursday.
"Unless something happens in overnight markets that is weird. If anything, it could be a text book auction," Goncalves said, adding that the 10-year yield could rise one or two basis points. Goncalves said he does not expect the Fed to begin to taper until March. Longer duration bonds are more sensitive to the end of quantitative easing, and the Fed has been emphasizing that it will not be moving short-term rates anytime soon.
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Stock traders are also likely to be watching the auction, with little else on the calendar Wednesday. There are earnings from Costco and Joy Global before the opening bell. Men's Wearhouse reports after the close, as does Vera Bradley.
Congress could also be in focus after lawmakers late on Tuesday said they had reached a budget agreement that could avoid another shutdown of the U.S. government.
"I definitely think if we see decent demand tomorrow, it's going to be an indication that the markets are not expecting a tapering this quickly," Goncalves said, referring to Wednesday's auction. He said foreign central banks have been buyers recently, with their Treasury holdings rising to more than $3 trillion last week for the first time. He said if foreign buyers show up in big numbers at the auction, they are either acclimated to higher yields or they do not expect the Fed to move next week.
"If (the 10-year) were to rally back down to 2.65/2.60 [percent], then tapering is off for December," he said.
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Gabe Mann, Treasury strategist at RBS, said some of Tuesday's move lower in yields had to do with short-covering. "At least from a technical picture, there's some headwinds the auction will have to clear. But the macro backdrop suggests, I would assume that the auction is going to come in line with recent averages," he said. "I would be surprised if this auction came with a big tail…I think demand will be pretty decent."
The 10-year ended Tuesday with a yield of 2.79 percent, well off the 2.86 percent reached Friday after November's jobs report showed 203,000 nonfarm payrolls. Mann noted that the 10-year auction went at a 2.75 percent yield last month. "We're now 5 basis points cheaper than that. It's not that much of a concession in the grand scheme of things," he said.
Goncalves said he expects Treasurys to rally into the end of the year. "If (investors) are of that view, then tomorrow's one of the best chances to get in. It's a big liquidity event," he said.
(Read more: Fed's Evans: Open-minded to Dec taper, but prefers waiting)
Stocks floundered Tuesday, with the S&P 500 down 5 at 1802, and the off 52 at 15,973.
—By CNBC's Patti Domm. Follow here on Twitter @pattidomm.