US Yields Rise After 3-Year Debt Auction

Even Muni Bonds May Be Targeted in 'Fiscal Cliff' Talks

Prices for U.S. Treasurys slid for a third session on Tuesday after a three-year note sale brought few surprises, with the outlook for an economic recovery offset by the sluggish pace of U.S. growth and government stimulus plans around the world.

The Treasury sold $32 billion in three-year notes at a high yield of 0.354 percent, right around what the market expected.

Yields remained higher after the auction, extending gains since data last Friday showing better-than-expected job additions boosted hopes for the world's biggest economy.

"Despite the backup (in rates) there's not a real rush to be a buyer down here," said Kim Rupert, managing director of global fixed income analysis at Action Economics LLC in San Francisco.

"With Q2 not looking like a real pickup in growth either and with so much stimulus globally, it's hard to hammer this market lower," she said. The result is a rangebound market, with investors feeling little urgency to take a position, she said.

(Read More: Gartman: Bear Market in Bonds Has Begun)

Nevertheless, many investors believe yields are unlikely to march significantly higher, barring new signs that the economic recovery shows greater resilience than expected.

"One decent number is not strong enough to completely change the mood of market players," said Jason Rogan, managing director of Treasurys trading at Guggenheim Partners in New York.

Benchmark 10-year note yields rose to 1.783 percent and touched a three-week high on Tuesday, up from 1.76 percent on Monday.

Rogan sees levels of 1.80 percent to 1.82 percent as likely to attract new buying from fund managers or central banks.

Thirty-year bond yields inched up to touch the key 3 percent level, up from 2.98 percent on Monday and also the highest since April 12.

The higher yields may help demand for this week's new supply, with the Treasury also due to sell $24 billion in 10-year notes on Wednesday and $16 billion in 30-year bonds on Thursday.

"The market has backed up nicely, and I believe that you're going to see pretty good sponsorship for some of this long-end paper," said Sean Murphy, a Treasurys trader at Societe Generale in New York.

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The Treasury also sold $20 billion in four-week Treasury bills to strong demand on Tuesday; it was the lowest amount for that auction since one held in 2001.

The bills sold at zero yields, the first time they have offered no return since January 2012.

Returns on the bills have plunged as the Treasury slashes its supply of short-term debt as it accumulates more cash from tax receipts, and as the government prepares for a new round of wrangling over the U.S. debt ceiling later this month.

(Read More: Everything You Think You Know About the Fed's Exit Plan May Be Wrong)

Returns on one-month bills dropped to only half a basis point in secondary trading on Tuesday, down from 3 basis points last week and from over 10 basis points in late February.

The Federal Reserve bought $1.46 billion in bonds due from 2036 to 2043 on Tuesday as part of its ongoing bond purchase program. It will purchase between $3.00 billion and $3.75 billion in notes due 2019 and 2020 on Wednesday.

US Treasury Yields

US 10-YR
US 30-YR