LONDON: US Treasuries edged lower on Tuesday with trading confined to a tight range, pressured by debate among Federal Reserve officials on whether the US central bank should exit its bond-buying programme early.
More dovish comments from Fed officials, who said the US economy still needs support from the full $600 billion of planned bond purchases curtailed a sell-off that began on Monday on raised bets the Fed would hike rates earlier than expected.
"The whole QE2 question is causing upward pressure on Treasury yields," said Philip Marey, strategist at Rabobank.
"Although a lot of Fed speakers are saying that the current amount of QE2 is about right, there is some worry that the Fed may have a gradual slowdown in QE2 ... and people are still worried about how much the end of QE2 will impact Treasury yields."
The June Treasury future was last down 1/32 at 119-3/64, while the benchmark 10-year yield was 1.7 bps higher at 3.455 percent. The yield on two-year paper was 1.5 bps up at 0.797 percent.
Trading volume has been light ahead of the end of the first quarter and the end of Japan's fiscal year on Thursday, with some investors also choosing to sit on the sidelines in view of the US government's March payrolls figures on Friday.
Treasury yields may rise further later in the session as market players look to make space for an auction of $35 billion in five-year notes at 1 p.m. EDT (1700 GMT).
Despite weak demand at Monday's two-year auction -- which ended with its first "tail" since May 2010 -- analysts expect the five-year sale to draw healthy interest, helped by demand from domestic money managers and possible Japanese buying.
"(It) should see a reasonable reception given the concession that has been built in after the safe haven-driven fall in yields to 1.85 percent and a 2/5 year spread at around 140 basis points, the middle of the range of the past five months, (and) particularly given the risks at the front of the curve from any signs of a less accommodative Fed stance in the coming quarter," said Marc Ostwald, strategist at Monument Securities.
The yield on five-year T-notes was 1.9 bps higher at 2.197 percent, with the 30-year yield up 1.4 bps at 4.512 bps.
Data due out later on the day include figures on weekly chain-store sales, S&P/Case-Shiller home prices and the Conference Board's confidence survey.
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