Most U.S. Treasurys were little changed on Tuesday, though prices on 30-year bonds fell as investors unwound some bets that the yield curve would continue to flatten.
Trading volumes were light with many traders out for vacation before a long U.S. holiday weekend. The yield curve between five-year notes and 30-year bonds steepened modestly after falling to five-and-a-half year lows on Monday on expectations that the European Central Bank may ease monetary policy as soon as next week.
"There has been recent flattening of the curve to the narrowest levels since January 2009, and some people are unwinding that trade," said Justin Lederer, an interest rate strategist at Cantor Fitzgerald in New York.
The yield curve steepened to 149 basis points , up from a low of 143 basis points on Monday. Most direction this week has been set by comments by ECB President Mario Draghi on Friday that the bank was prepared to respond with all available tools if euro zone inflation drops further. Investors took this to mean the ECB could start an asset purchase program or other stimulus measures.
European bond yields fell to record lows on Tuesday, helping Treasuries rally earlier in the day. The next ECB policy meeting is on Sept. 4. "It's tough for Treasuries to sell off here given what's going on in Europe," said Gennadiy Goldberg, interest rate strategist at TD Securities in New York.
Earlier, the Treasury Department auctioned $29 billion in two-year notes at a high yield of 0.53 percent. The bid-to-cover ratio, an indicator of demand, was 3.48—the highest since May—compared to a 3.40 recent average.
Indirect bidders, which include major central banks, were awarded 39.8 percent—the highest since March. Direct bidders, meanwhile, purchased 12.1 percent, which was the lowest since June 2013.
Benchmark 10-year Treasury notes fell 2/32 in price to yield 2.39 percent, meanwhile the two-year note rose modestly, bringing the yield down to 0.50 percent. Thirty-year bonds fell 12/32 in price to yield 3.15 percent.
The is scheduled to auction $35 billion in five-year notes on Wednesday and $29 billion in seven-year notes on Thursday, as well as $13 billion in two-year floating-rate notes on Wednesday.
—By Reuters with CNBC