U.S. Treasury yields fell on Tuesday after the U.S. government's auction of 3-year Treasury notes, the first of three debt auctions this week.
The Treasury Department auctioned $27 billion in three-year notes at a high yield of 0.992 percent, the highest since May 2011. The bid-to-cover ratio, an indicator of demand, was 3.38.
In the "when issued" market, traders had expected the issue due July 2017 fetch a yield of 0.996 percent.
Indirect bidders, which include major central banks, were awarded 38.2 percent of the supply, their largest share since February.
Three-year Treasury notes rose 3/32 in price to yield 0.943 percent after the announcement.
The yield on benchmark 10-year Treasury notes—used to calculate mortgage rates and other consumer loans—last stood at 2.56 percent, down from 2.62 on Monday. The 30-year bond, meanwhile, was up 1 6/32 in price to yield 3.38 percent, down from yesterday's 3.44 percent.
U.S. government debt yields declined for a second day on the notion that last week's report showing hefty job gains in June was not strong enough to spur the Federal Reserve to raise short-term interest rates before the second half of 2015, analysts and traders said.
"The weak wage component offset the stronger-than-expected headlines, so there's nothing to set off the Fed for an earlier rate hike," said Charles Retzky, director of futures sales at Mizuho Securities USA in Chicago.
Minneapolis Fed President Narayana Kocherlakota said the drop in unemployment is welcomed, but the labor market still has a long way to go before the Fed has reached its goals, including achieving a 2 percent inflation target. He added inflation would likely average below 2 percent for the next four years.
This dovish view helped the bond market to hold its gains, driving longer-dated yields further below two-month peaks set on Thursday during an initial bond market sell-off in reaction to the June payrolls data.
On Wall Street, major stock indexes sagged with the Standard & Poor's 500 index falling 0.7 percent.
Foreign demand for higher-yielding Treasurys also stoked the fall in yields as disappointing German economic data fed expectations the European Central Bank would resort to quantitative easing and lower rates to stimulate the regional economy.
A surprise drop in U.K. factory output raised the hope that the Bank of England might delay plans to increase rates in early 2016, spurring a drop in Gilt yields.
"The bond market is taking its cue (partly) from Europe," said Jeffrey Kleintop, chief market strategist with LPL Financial at a presentation with reporters here. He added the recent disappointing data on Europe would likely help keep a lid on a significant rise in U.S. yields.
The German government said earlier that the euro zone's biggest economy posted larger-than-forecast drops in exports and imports in May, while data showed British factory production in May suffered the biggest fall since January 2013.
Separately, the Fed bought $1.067 billion in bonds due in 2036 to 2043, part of its planned $19 billion Treasuries purchases in July.
—By Reuters with CNBC