US bond prices hold gains after three-year note sale

U.S. Treasurys

U.S. Treasurys prices rose on Tuesday as investors focused on when the U.S. central bank is likely to pare back this $85-billion-a-month buying program.

The Treasury auctioned $30 billion in three-year notes at a high yield of 0.631 percent. The bid-to-cover ratio, an indicator of demand, was 3.55.

The benchmark 10-year note last traded 12/32 higher in price with a yield of 2.802 percent.

U.S. Treasurys prices rose earlier on Tuesday as investors bought to exit bearish bets in advance of a an auction, part of this week's $64 billion in coupon-bearing government debt supply. The Treasury will also hold a $21 billion reopening of 10-year notes on Wednesday and a $13 billion auction of a prior 30-year bond issue on Thursday.

Bond yields retreated further from their three-month highs as traders reconsidered whether the Federal Reserve would shrink its third round of quantitative easing at its two-day policy meeting next week in the wake of an upbeat November payrolls report and other encouraging economic data.

Even if the Fed were to signal a pullback in bond purchases, policy-makers will likely opt for a small one in order to not trigger a bond market sell-off, which would send long-term interest rates higher and hurting the housing market.

"We might see a gradual tapering. The Fed won't let rates go much higher,'' said Larry Milstein, head of government and agency trading at R.W. Pressprich & Co. in New York.

Expectations for the Fed

The 10-year yield climbed to 2.932 percent on Friday, which was the highest since Sept. 11, in a reaction to a stronger-than-forecast jobs report for November.

"The market has fully priced in a tapering. A 2.90 percent yield might be an overshoot,'' said John Herrmann, director of interest rates strategy with Mitsubishi UFJ Securities USA in New York.

The 30-year Treasury bond was last up 23/32 in price, with yields falling to 3.832 percent.

—By Reuters