Treasury Department auctions $26 billion of 2-year notes at a high yield of 0.692%

Bond yields turned flat on Tuesday after the U.S. government's auction of two-year Treasury notes, the first batch of this week's offering of new debt supply, met below-average demand.

The Treasury Department auctioned $26 billion in two-year notes at a high yield of 0.692 percent. The bid-to-cover ratio, an indicator of demand, was 3.38, below the recent average of 3.44.

The yield was up slightly at 0.68 percent, compared to 0.66 moments before the announcement. The benchmark 10-year yield was higher at about 2.41 percent—up from 2.36 percent in New York trade on Monday.

Prices slipped earlier after Federal Reserve Governor Jerome Powell said the central bank could raise interest rates in September, while persisting optimism for a Greek debt deal also weighed on prices.

Powell said the U.S. economy could be ready for a first interest rate hike in September followed by a second increase in December and that the economy is likely to strengthen in the second half of the year. Rate hikes are expected to hurt bond prices.


Earlier, the U.S. Treasury Department sold $25 billion worth of one-month bills amid the strongest overall demand in nine months and paid no interest to investors for a second straight auction, Treasury data showed.

The ratio of bids submitted to the amount of one-month T-bills offered was 4.80, up from the previous week's 4.64 and the highest since 5.11 at an auction held on Sept. 23.

On the data front, U.S. durable goods orders fell 1.8 percent and new home sales rise to seven-year high in May.

Read MoreDurables, housing data on tap but Greece takes center stage

"Bottom line, capital spending remains sluggish but that is not new news. It is unfortunately more of the same," Peter Boockvar, chief market analyst at The Lindsey Group, said in a note.

"In the U.S., today brings various top-tier releases, led by durable goods orders data for May, which are expected to see a moderate drop of around 0.75 percent month-on-month, which would make it the second consecutive monthly drop, again probably caused by weak results for transportation goods, particularly aircraft," analysts at Daiwa Capital Markets said in a note.

"Today's release of new home sales results for May is likely to show a very modest increase from the previous month's reading of 517k," they added.

Yields rose on Monday amid hopes of a Greek deal and after strong U.S. existing home sales data reinforced expectations for a September rate hike.

Read MoreClock ticks for Greece after 'major' step forward

Greece remained a major focus for markets amid signs that the cash-strapped country is moving closer to a deal with its international creditors that will help avoid a debt default and possible exit from the euro zone.

Reuters contributed to this report.