Traders will be looking to the Federal Reserve's post-meeting news conference on Wednesday for clues about its handling of the slowdown in the economic recovery and what it will mean for US rates. Volume in the Treasury market was thin on Tuesday before an important confidence vote on the Greek government. Traders said they expected volume to pick up again on Wednesday once the outlook on Greece's debt crisis was clearer.
"We would expect that we would see higher rates by the morning unless another big event happens," said Michael Pond, Treasury and inflation-linked strategist at Barclays Capital in New York. US Treasury prices fell on Tuesday as optimism that Greece would be able to stave off a default buoyed stocks and drew investors away from defensive positions in safe-haven US debt.
Traders said they were focusing on the likelihood that Prime Minister George Papandreou would win a confidence vote in parliament about 2100 GMT, putting Greece a step closer to receiving its next instalment of aid from the European Union and the International Monetary Fund.
"There continues to be a very good underlying bid below the market, with buyers coming during the pullbacks," said Marty Mitchell, chief market technician at Stifel Nicolaus in Baltimore. The two-way pull was visible in Treasuries' price action throughout the day: Selling in the morning gave way to a bout of short-covering around noon that pulled prices back to the previous day's closing levels.
Another factor pressuring bond prices was the release of economic data showing sales of existing US homes fell 3.8 percent in May, less than some had feared. Trading volumes on Tuesday were light, however, as many investors were reticent to enter into new positions before the result of the Greek vote.
"You've got people on the sidelines," said James Combias, head of government bond trading at Mizuho Securities in New York. "A lot of people have done what they needed to do and are waiting here to get a better feel." Benchmark 10-year notes were last down 6/32 in price to yield 2.98 percent, up from 2.96 percent late on Monday. The notes have yield support at around 3.04 percent, and resistance at 2.88 percent, their lowest yield level since the beginning of December.
Five-year notes fell 2/32 in price to yield 1.55 percent, up from 1.53 percent, and 30-year bonds dropped 15/32 in price to yield 4.23 percent, up from 4.20 percent. Meanwhile, short-dated interest rate swap spreads retraced on Tuesday, though they remained near their widest levels in at least 6 months, as concerns ebbed over contagion from the troubled eurozone.Two-year swaps tightened half of a basis point to 26.75 basis points. They traded as wide as 28 basis points last Thursday, the widest level since early December.
Five-year swap spreads were unchanged on the day at 30.75 basis points. They had widened to 32 basis points on Thursday, the widest level since last June. The Fed on Tuesday bought $4.91 billion of notes due 2016 to 2018 in the second to last week of its $600 billion bond purchase program.