Treasury Department auctions $29 billion of 7-year notes at a high yield of 2.125%

US 10-YR
US 30-YR

U.S. sovereign bonds stayed lower on Wednesday after the government's latest auction saw tepid demand, and as investors bet that strong economic data will prompt the Federal Reserve is closer to raising interest rates.

The Treasury Department auctioned $29 billion in seven-year notes a high yield of 2.125 percent, the highest since September. The bid-to-cover ratio, an indicator of demand, was the weakest since November 2013 at 2.39.

Seven-year notes were trading 6/32 lower in price and yielding 2.10 percent after today's auction. Traders had expected the new notes to price at 2.12 percent, according to the "when issued "market.

Benchmark 10-year Treasury notes fell 9/32 in price to yield slid to 2.29 percent after closing at 2.257 percent on Wednesday.

Bonds weakened on Tuesday after and after gross domestic product came in much higher than expected for the third quarter, and Treasurys extended losses after the government had to pay slightly more to sell new five-year debt.

Thirty-year bonds also took the brunt of Tuesday's selloff as investors unwound flattening trades that have been profitable this year, said traders. The bonds were last trading 10/32 lower in price at 2.87 percent.

"People are gaining confidence that the economy is on very solid ground, and the Fed is probably going to move earlier than June, and that all rates should rise," said Charles Comiskey, head of Treasuries trading at Bank of Nova Scotia in New York.

Short and intermediate-dated debt has been most hurt in recent months by expectations of an interest rate hike, while thirty-year bonds have been in strong demand as investors reach for yield, and on concerns about deflation.

Now, "people are coming to grips that interest rates are going to rise and the front-end can only go so far before an actual rate hike. Some of the selling pressure is moving out the curve," Comiskey said.

Thin trading conditions heading into Thursday's Christmas holiday have dented demand and exacerbated price moves this week.

The bond market will close earlier than usual on Wednesday at about 2 p.m. (1900 GMT). It will be closed all day on Thursday.