By Deborah Levine, MarketWatch NEW YORK (MarketWatch) -- Treasury prices pared gains on Tuesday, after earlier retracing some of the big moves on Monday, as traders set up for the government's first major note auction of the week. "The big event of the day still looms: the $38 billion 3-year auction," said strategists at CRT Capital Group. Bonds gained earlier in the session as investors reconsidered the ramifications of the European Union's and International Monetary Fund's massive rescue package on the euro and economic growth in the region, weighing on global equity markets. Yields on 2-year notes (UST2YR 0.85, -0.01, -1.40%) declined 1 basis point to 0.85%, retracing some of Monday's move higher. Yields move inversely to prices and a basis point is 0.01%. Last Thursday, yields on the short-term securities closed at the lowest since February. Yields on 10-year notes (UST10Y 3.53, 0.00, -0.08%) were little changed at 3.54%. On Monday, they closed 11 basis points higher on the initial news of the package. Last week, the benchmark yields closed at the lowest since early December. "Growing concerns over the IMF plans to bail out Europe is pressuring the euro and global stocks lower," said Tom di Galoma, head of U.S. rates trading at Guggenheim Partners. "The backdrop of slower growth should keep the bid in Treasurys as well." In mid-morning trading, stocks pared declines and the dollar (CUR_EURUSD 1.2699, -0.0087, -0.6804%) retraced some of its gains against the euro. Read more on dollar, euro. Auction stats Also sharing the spotlight for bond traders, the government will auction $38 billion in 3-year notes (UST3YR 1.34, -0.03, -1.83%) , which is $2 billion less than last month's sale. Bids are due at 1 p.m. Eastern time. See Web site for recent bond auction results. With the rally in the last week and again on Tuesday, "market conditions for this auction are probably tougher today but the 5% cut in supply will help to offset that negative somewhat," said strategists at RBS Securities. It's the first reduction in the amount of 3-year notes sold since May 2007, right before the government went to issuing the securities monthly instead of quarterly. At the last four 3-year note sales, bidders offered to buy an average of 3.01 times the amount of debt sold, according to CRT. Indirect bidders, a group that includes foreign central banks, bought 48.3% of the sales, on average. Direct bidders, a class that includes domestic money managers, purchased another 13.65 on average. It's generally deemed good for the broader bond market when more of an auction is sold to direct and indirect bidders, who are more likely to hold onto the securities, versus primary dealers, which often have to turn around and sell them into he market, pressuring prices. The government will sell $24 billion in 10-year notes on Wednesday, the first reduction in size for the benchmark notes since May 2005. The Treasury Department will end the week with $16 billion in 30-year bonds (UST30Y 4.41, +0.00, +0.05%) on Thursday. It will be the first cut in the amount of the so-called long bonds sold since February 2007, just after the government reintroduced the notes after a long hiatus, a point when they tend to sell larger amounts to improve liquidity in what is effectively a new security.

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