Treasuries fell in light volume on Monday as a third day of stock market gains drew investors away from safe-haven US government debt. US stocks and oil prices rose on acquisition news - Google offered to buy Motorola Mobility Holdings Inc for about $12.5 billion in cash - and hopes for progress as the result of a meeting on Tuesday between French President Nicolas Sarkozy and German Chancellor Angela Merkel on Europe's debt crisis.
In contrast, the benchmark 10-year US Treasury note fell 14/32, its yield rising to 2.31 percent from 2.24 percent late on Friday. Early in the day, that yield fell to 2.25 percent after a New York State manufacturing gauge showed the sector contracted for the third month in a row in August.
The Treasury sold three- and six-month bills in a weekly auction with the statistical results more "normal" than the ones for last week's bill sales, which occurred just after Standard & Poor's ratings downgrade, said Thomas Simons, money market economist at Jefferies & Co in New York.
Also at the short end of the maturity range, two-year notes yielded just 0.20 percent after falling to record low yields last week when the Federal Reserve said it would likely keep its federal funds rate at 0 to 1/4 percent at least through mid-2013. "With the Fed statement last week, the volatility in the front end is going to drop off the table," said Charles Comiskey, Bank of Nova Scotia's head Treasury trader in New York.
Volume was subdued in the midst of the vacation season. "The first quiet day in some time was greeted with relief from many of the investors I speak to, and here on the (trading) desk," said John Briggs, Treasury strategist at RBS Securities in Stamford, Connecticut.
Investors see potential for more price moves among longer-dated bonds as investors reach for yield and try to assess the likelihood of more Fed purchases of longer-dated bonds to help stimulate the lagging economy.
"The action's going to be in the 7s, 10s and 30s," Comiskey said. In late trade, the 30-year bond fell 27/32 in price, its yield rising to 3.77 percent from 3.70 percent late on Friday. The seven-year note slipped 7/32, its yield rising to 1.60 percent. Many analysts think 10-year note yields could fall below 2 percent as the economy slows. That call is at risk, however, if investors begin to worry that Fed stimulus will increase inflation and hurt the buying power of fixed-income investments.
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