US Bonds Fall on Budget Hopes, German Data

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U.S. Treasurys fell on Tuesday as investors saw signs of hope in budget talks in Washington and in the German economy, ahead of expected easing announcement from the Federal Reserve on Wednesday at the conclusion of its two-day meeting.

Investors saw flickers of progress in reports of a pick-up in the pace of talks to avert the U.S. "fiscal cliff" of steep tax hikes and spending cuts set for the new year, although Republicans and Democrats remain far apart.

"There's always a concern about a deal not getting done. It's a cat-and-mouse game in Washington right now, but you hope things are moving along," said Sean Simko, head of fixed income management at SEI Investments Co in Oaks, Pennsylvania.

Benchmark 10-year Treasury notes were trading 10/32 lower in price to yield 1.652 percent, the highest in about two weeks.

Thirty-year bonds were 26/32 lower in price to yield 2.838 percent, up from 2.80 percent on Monday.

Still, investors this week will focus on Wednesday's conclusion to the Federal Reserve's two-day policy meeting, which is widely expected to produce another bond-buying program.

A new program could take effect once the current Operation Twist stimulus program finishes at month-end, Nomura analysts wrote.

"We expect additional purchases of Treasurys to match the size and pace of notional purchases ($45 billion/month) of Operation Twist," they wrote.

Half the respondents in a Reuters poll on Friday said they too expected $45 billion per month in buying through a new round of Treasury securities purchases.

An unexpectedly strong reading on German investor sentiment also nudged investors toward riskier assets such as stocks.

Germany's ZEW economic sentiment index jumped to 6.9 in December, far higher than the -12.0 forecast and the previous reading of -15.7.

Italian markets, jittery on Monday after Prime Minister Mario Monti's decision to step down early, also proved calmer on Tuesday. (Read More: Italy's Berlusconi Attacks 'Germano-Centric' Monti.)

Treasurys held early losses after a three-year note auction attracted lukewarm bidding, as a record low yield perhaps deterred some potential buyers.

The U.S. Treasury sold $32 billion of three-year notes at a high yield of 0.327 percent, with a below-average bid-to-cover ratio of 3.36.

"Obviously it was on the rich side, and I think that probably contributed to some of the fairly lackluster bidding," said Kim Rupert, managing director of global fixed income analysis at Action Economics LLC in San Francisco.

In addition, the Treasury will sell $21 billion in 10-year notes on Wednesday and $13 billion in 30-year bonds on Thursday. Traders typically push for lower Treasury prices heading into such auctions.

US Treasury Yields

US 10-YR
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