Treasurys mixed after strong 3-year sale

Shorter-maturity government debt prices hold gains after auction of $35 billion in notes.

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By Catherine Clifford, CNNMoney.com staff writer

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NEW YORK (CNNMoney.com) -- Government bond prices were mixed Tuesday, with shorter-term debt holding gains after a 3-year auction showed strong demand.

Shorter-maturity notes were strengthened by the healthy demand. The 30-year long bond's price fell as traders prepared for auctions in those maturities later in the week.

The benchmark 10-year note rose 5/32 to 94-1/32, and its yield slipped to 3.86% from 3.88%. Bond prices and yields move in opposite directions.

The 2-year note edged up 9/32 to 99-5/32, and its yield dipped to 1.32% from 1.42%. The yield on the 3-month note held steady at 0.18%.

The 30-year bond fell 16/32 to 93-19/32, and its yield jumped to 4.65% from 4.62%.

Debt sale: The government sold $35 billion in 3-year notes Tuesday as it continues to sell debt to fund deficit spending. Would-be buyers bid $99 billion for the debt, a healthy 2.82 ratio to the debt sold that was viewed as a vote of confidence.

"For $35 billion to be auctioned and to be received that well is very good," said Kim Rupert, fixed income analyst at Action Economics. The auction showed strong demand from foreign buyers, a critical component to the massive U.S. debt market.

But Rupert warned that one strong auction does not mean the end of supply worries.

"There is still a huge underlying fear that one of these days we are not going to see this kind of demand for the paper, or if we do, it is going to be at much higher interest rates," said Rupert. "The big picture is really ugly."

The government sales continue Wednesday, with $19 billion in the reopening of a 10-year note, and Thursday, with $11 billion in the reopening of a 30-year bond. All totaled, $65 billion in debt will be sold this week.

Economy: In an indication of an economic recovery, U.S. government regulators said Tuesday that 10 of the banks that received government bailout loans will be allowed to give $68 billion back to taxpayers.

However, according to Rupert, the announcement did not move Treasury prices because the market was already expecting it.

Buyback continues: As the Treasury sells debt, it is also scooping some back up. The government plans to buy back $300 billion in Treasurys in an effort to stimulate demand and hold down yields. Rising yields push mortgage rates higher, threatening a recovery in the housing market.

As part of that campaign, the Federal Reserve bought $7.5 billion worth of debt on Monday that matures between December 2013 and April 2016. The Fed was scheduled to purchase an undisclosed amount of debt Wednesday.

Lending rates: One key bank-to-bank rate held steady. The 3-month Libor was nearly unchanged at 0.65%, according to Bloomberg.com.

The overnight Libor rate ticked up to 0.27% from 0.26% the day prior.

Libor, the London Interbank Offered Rate, is a daily average of rates that 16 different banks charge each other to lend money. The closely-watched benchmark is used to calculate adjustable-rate mortgages. More than $350 trillion in assets are tied to Libor. To top of page

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