US Treasury debt prices fell on Monday as the bearish tide that followed last week's robust jobs report continued to sweep the market lower. Just two days before the Federal Reserve meets to decide on its next monetary policy step, bonds were still reeling from news of a considerable pickup in hiring during October.
Not only did the US employment data cement expectations for another quarter percentage point rate hike this week, it also boosted the chances for another tightening in December.
Traders said worries about just what the Fed's post-meeting statement on the economy might contain largely overshadowed a surprisingly strong auction of $22 billion in 3-year notes.
The new debt went at a high yield of 3.090 percent and drew bids for 2.24 times the amount on offer, well above August's 2.02 level and the average of 2.12 for the year.
Indirect bidders, including customers of primary dealers and foreign central banks, picked up a hefty $11.55 billion, or 53 percent, of the issue, well above August's 36 percent share, which should please traders. Primary dealers took $9.96 billion of the sale.
Despite the upbeat reception, the benchmark 10-year note remained 11/32 lower for a yield of 4.22 percent compared with 4.18 percent at Friday's close.
"The three-year was a great auction but it just doesn't matter that much to the market," said Andrew Brenner, head of fixed-income at Investec US "The next key piece of information really is how the Fed phrases the statement."
Interest rates futures now show a better than 80 percent chance of a hike in December and have gone some way to pricing in a further rate rise for February.
But at the very least, good demand for 3-year debt suggested the market would not have much trouble absorbing the remainder of the week's $51 billion Treasury refunding.
The 3-year note was off 3/32 in price, taking its yield up to 3.01 percent from 2.98 percent on Friday and 2.76 percent this time last week.
The 5-year note lost 7/32, taking yields to 3.52 percent from 3.47 percent. The 30-year bond shed 18/32, sending yields to 4.94 percent from 4.90 percent.
At the short end, the two-year note continued to suffer from heightened expectations the Fed would also raise rates in December. Bond bulls had hoped the Fed would pause after a hike this week but strength in payrolls forced them to reconsider.
That was weighing heavily on the two-year note, which dropped 2/32 on Monday, on top of a 9/32 fall last Friday. Its yield climbed to 2.81 percent from 2.77 percent on Friday and 2.60 percent this time last week. Bears are now set to test a 2.84 percent high from July.
The swift rise in short-term yields has seen the spread between them and 10-year yields narrow to 141 basis points, its lowest level since the emergency rate cuts of September 2001.