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Bonds fall as 2-year note auction sees weak demand

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U.S. government bonds held on to earlier losses Tuesday after of the U.S. government's auction of two-year Treasury notes, the first of three debt auctions this week.

The Treasury Department auctioned $29 billion of two-year notes at a high yield of 0.425 percent, the lowest yield since May.

The bid-to-cover ratio, an indicator of demand, was the weakest since September 2013 at 3.11, versus a recent average of 3.42.

The notes were flat in price after the announcement and yielding 0.39 percent.

Benchmark 10-year Treasury notes fell 4/32 in price to yield 2.28 percent, while the 30-year bond dropped 6/32 in price to yield 3.05 percent.

Treasurys eased on Tuesday as global equities markets rose and as investors awaited the results of a U.S. Federal Reserve policymakers' meeting that could move markets.

The Federal Open Market Committee will release its statement on Wednesday afternoon, following the two-day meeting that starts on Tuesday. Officials are expected to declare the end of its bond-buying program.

Read MoreWhat traders are watching while they wait for the Fed

Analysts predict the FOMC will try to soothe recent market volatility by reinforcing the message that while the Fed is winding up its stimulus program it could wait quite a while before raising historically low U.S. interest rates

"The favorable impact of lower gasoline prices on household budgets seems likely to have outweighed consumer concerns about volatile equity markets and the [remote] risk of the Ebola virus spreading in the U.S.," said Daiwa Capital Markets' Robert Kuenzel in a research note on Tuesday.

Earlier, the Conference Board said its consumer confidence index jumped to the strongest level since October 2007, following a marked drop in September, while a separate report showed durable goods—orders from U.S. businesses for capital goods—fell to the lowest in eight months in September.

Initially higher, bonds pared gains after the Case-Shiller index showed housing prices rose less than expected. The Index rose 5.6 percent year-over-year in August, down from the 6.7 percent reported for July.

Reuters contributed to this report.