Treasury prices gave up earlier gains Tuesday, sending yields higher, after the Federal Reserve bought $7 billion in U.S. debt, mostly maturing in 2016.
A turnaround in stocks also decreased the appeal of bonds as an alternative asset.
Ten-year note yields , which move inversely to prices, rose 5 basis points to 2.88%, after earlier trading as low as 2.78%. A basis point is 0.01%.
Yields on 2-year notes rose 2 basis points to 0.92%.
The Fed said it would be purchasing specific securities maturing between 2016 and 2019. However, almost half of its actual purchases were those due in 2016, with a very limited amount in 10-year debt, disappointing some analysts and leading to a bigger sell-off in longer-dated debt. See results on Fed's Web site.
Primary dealers offered $26.8 billion to be purchased.
Treasurys were higher earlier as the Fed was expected to buy $7.5 billion in debt this time, said Wrightson ICAP, a research firm specializing in government finance. That is approximately how much it has bought in past purchases of similar maturity ranges.
It previously purchased $52.71 billion in Treasurys since announcing in mid-March it would buy about $300 billion in U.S. debt to help keep mortgage rates and other borrowing costs low.
On Thursday, the Fed will be buying shorter-term securities.
Traders are also eyeing stocks, which turner higher after earlier pressure following disappointing quarterly financial results from Bank of New York Mellon and as blue chips DuPont ) and Merck lowered their outlooks.
Treasurys were supported earlier after Kansas City Fed President Thomas Hoenig said the current federal bailouts of big financial firms is distorting the economy and prolonging the crisis. The comments came in testimony to Congress about banks that are deemed "too big to fail."
Treasury Secretary Timothy Geithner also testified on Capitol Hill, mostly about the Troubled Asset Relief Program, or TARP.
Investors are looking for any details of the ongoing stress tests, Andrew Brenner, co-head of structured products and emerging markets at MF Global, wrote in an email.
Investors have stepped to the sidelines to wait for more information about the government's so-called stress tests of banks. The government will release on Friday information about how it's evaluating banks, with the results expected to come out in early May.
California, here it comes
Treasurys are also being pushed a bit by hedging activity before California's taxable bond offering on Wednesday, expected to be up to $4 billion.
Similar to maneuvers before big corporate bond sales, ahead of this California sale, strategists said companies and traders may be entering into what's known as rate-lock agreements in which they bet on Treasury prices falling to guard against the effect higher yields would have on the planned debt sale. Once the debt is sold, the hedges are reversed.
California and other municipalities, which usually issue tax-exempt debt and have very little affect on the broader taxable market, have lined up to sell taxable Build America Bonds, part of Congress' economic stimulus package earlier this year to encourage spending on infrastructure projects to create jobs. Read more on Build America Bond deals.
Under the program, public entities can sell taxable debt and receive a subsidy from the federal government, making the financing cheaper than their tax-exempt option.
On Monday, the New Jersey Turnpike Authority sold $1.375 billion in bonds, much more than initially expected and so far the largest deal done under the nascent program.
Demand for the California debt has reduced the amount, relative to Treasurys, the state may have to pay to issue the bonds.
For the longer-term portions of the sale, analysts said the state may have to pay 3.75 percentage points more than Treasurys, or about 7.47% if priced now. That spread is lower than earlier expectations.
