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Bonds hold gains after 3-year note sale; Yellen eyed

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Treasurys were higher on Tuesday after the government's auction of three-year notes as traders looked ahead to a potentially market-moving congressional testimony by Federal Reserve Chair Janet Yellen.

The Treasury Department auctioned $29 billion in three-year notes at a high yield of 0.928 percent. The bid-to-cover ratio, an indicator of demand, was 3.40, compared to a recent average of 3.32 percent.

Prices of 10-year notes were up 6/32 in New York, yielding 2.59 percent. On Friday, the issue yielded as little as 2.57 percent, a three-month trough.

U.S. 30-year bond yields stood at 3.38 percent, reflecting a price rise of 20/32. Shorter Treasury maturities were flat or little changed.

Read More CNBC explains: Treasury bond prices and yields

"We're having a little mini rally now but it's hard to see a narrative based on fundamentals when Yellen will be the topic of discussion for everyone," said Michael Cloherty, head of U.S. interest rate strategy at RBC Securities.

Yellen was due to speak at congressional hearings on Wednesday and Thursday. Though widely expected by analysts to maintain a dovish policy stance, she will be closely watched for hints on raising interest rates, which many forecasters see starting in 2015.

Cloherty said he wanted details about how Fed policymakers will decide on tightening. "It's been a while since we had that," he said.

A 10-year note auction for $24 billion is scheduled for Wednesday and a $16 billion auction of 30-year bonds is due on Thursday.

"Normally you'd expect things to cheapen up a bit" ahead of auctions, Cloherty said. "But we haven't seen much in the way of concessions. Today's is the easiest of the three. And, if we don't get much in the way of concession, things could get sloppier for the 10- and 30-year."

Read MoreThe bond market is giving the stock market angst

Treasuries reacted little to news of U.S. trade data showing that America's monthly trade deficit in March had narrowed as U.S. exports rose. The Commerce Department said the trade gap narrowed 3.6 percent to $40.4 billion.

Economists polled by Reuters had forecast the trade deficit falling to $40.3 billion in March.

"It was what everyone expected and in line with forecasts," Cloherty said.

—By Reuters