Bonds pare losses as traders digest Fed minutes

US 10-YR
US 30-YR

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Bonds edged up from session lows on Tuesday after the release of minutes from the last Federal Reserve meeting, which said the central bank has begun detailing how it plans to ease the U.S. economy out of its easy monetary policy period.

The minutes from the June 17-18 meeting indicate the Fed envisions using its overnight repurchase agreements in tandem with the interest it pays banks on excess reserves to set a ceiling and floor for its target interest rate.

Though no decisions have been announced, the discussion has become detailed enough for Fed officials to contemplate the proper spread between the two - mentioned in the minutes as 20 basis points.

After the announcement, the yield on the two-year note rose to 0.52 percent after briefly touching 0.54 percent. The three-year note yield was last at 0.99 percent, having jumped to 1.039 percent earlier.

Benchmark 10-year Treasurys were last flat in price to yield 2.56 percent, while the 30-year bond gained 6/32 in price to yield 3.37 percent.

Earlier, the Treasury Department auctioned $21 billion in 10-year notes at a high yield of 2.597 percent, the supply's lowest yield since June 2013. The bid-to-cover ratio, an indicator of demand, was 2.57, the weakest since February.

Indirect bidders, which include major central banks, were awarded 39.63 percent, below the 44.16 percent recent average.

The bond market pulled back after rallying on Tuesday due to stock market losses on worries about corporate earnings, overseas trade data as well as the intensified fighting between militants in Gaza and the Israeli military.

"It's a tug-of-war between the lift-off date and reacting to Europe and asset allocation,'' said Justin Lederer, Treasury strategist at Cantor Fitzgerald in New York.

Expectations that the European Central Bank might engage in more stimulus to help its struggling economy have also fed demand for Treasurys that are yielding more than German Bunds.

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—By Reuters with CNBC