U.S. Treasury prices fell on Wednesday and benchmark yields edged up from five-week lows, with prices dragged lower by weaker German government debt.
Bund prices declined partly on robust demand for a new 10-year issue of Spanish government debt, signaling investors' appetite to buy riskier euro zone assets as the region has shown some signs of better times ahead.
"Treasuries are following Bunds and other core euro zone debt,'' said Gennadiy Goldberg, an interest rate strategist at TD Securities in New York.
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U.S. government debt prices also fell on hedging tied to this week's corporate debt supply and worries about the Federal Reserve pulling back stimulus further at its upcoming policy meeting.
Despite the early market weakness, Treasury yields have held in a tight trading range between 2.80 percent and 3.00 percent since the beginning of the year.
"The market is not sure where to go next,'' Goldberg said.
In the absence of major economic data this week, most investors moved to the sidelines, awaiting the Fed's decision on policy when it meets next Tuesday and Wednesday.
There is a growing consensus Fed policy-makers will likely shrink its third round of quantitative easing (QE3) for a second straight meeting. Some analysts forecast the Fed will lower its monthly purchases of Treasuries and mortgage-backed securities by $10 billion to $65 billion in February.
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"The Fed will likely continue to taper at $10 billion per meeting (this year),'' said Carsten Quitter, chief investment officer at Allianz Life Insurance of North America in Minneapolis which has over $100 billion in assets.
According to a J.P. Morgan Securities survey released earlier Wednesday, 68 percent of the firm's Treasuries clients said on Tuesday they had a neutral position in U.S. government debt, up from 64 percent the previous week.
In the meantime, the U.S. central bank brought $2.25 billion to $3.00 billion in Treasurys due in February 2021 to November 2023 for its QE3 program.
On the open market, benchmark 10-year Treasury notes were down 7/32 in price with a yield of 2.863 percent.
The 10-year yield fell to 2.818 percent last Friday, which was its lowest since Dec. 11, according to Reuters data.
Treasurys lagged their German counterpart with their 10-year yield premium over 10-year Bunds rising to 1.09 percentage points, the biggest in two weeks.
The yield on 10-year Bunds rose to 1.760 percent from 1.744 percent on Tuesday.
While benchmark U.S. and German yields rose, peripheral euro zone government yields fell, led by Spain whose new 10-year debt issue has fetched intense demand.
The yield on 10-year Spanish sovereign debt fell near eight-year lows on Wednesday at 3.693 percent.
As for domestic supply, U.S. companies sold about $11 billion in investment-grade debt on Tuesday, bringing the month-to-date total close to $83 billion, according to IFR, a unit of Thomson Reuters.