US government debt prices edged up on Tuesday as safe-haven bids on nagging concerns about Europe's fiscal woes and the struggling US economy offset new debt sales by the Treasury. The Treasury sold $32 billion in new three-year notes on Tuesday at a high yield of 3.67 percent, the first in $66 billion in sales scheduled for this week.
A $21 billion sale of ten-year notes on Wednesday is expected to generate relatively strong demand as US government bonds benefit from a lack of alternatives for investors seeking relatively low-risk debt.
"The demand for Treasuries far outstrips the supply. Treasuries are the last man standing in regards to safe assets," said Lou Brien, market strategist at DRW Trading in Chicago.
Concerns that Europe will fail to contain its debt crisis have led investors to seek out US debt after the euro slumped to a new two-year low against the dollar.
Euro zone ministers struggled to reassure financial markets on Tuesday that an aid package for Spain they outlined overnight will help stabilise the currency bloc - a task made all the harder by a German legal challenge to its crisis-fighting tools.
Treasuries have also benefited relative to German bunds as concerns over Germany's liability for weaker euro zone nations increased volatility in the country's bonds.
At the same time, increasing bets that a slowing economy will prompt the US Federal Reserve to launch a third round of quantitative easing has led investors to anticipate that Treasuries yields could drop even further from historic lows.
Benchmark 10-year notes traded with yields of 1.51 percent on Tuesday, only 7 basis points higher than a roughly 200-year low 1.44 percent set on June 1.
"We are seeing more Fed officials saying QE3 is making sense," said Larry Milstein, head of government and agency trading at R.W. Pressprich & Co. in New York.
Last Friday's disappointing report on the labour market in June and recent comments from Fed officials have raised expectations that the US central bank may be ready to embark on a third round of large scale bond purchases, dubbed QE3.
Three top Federal Reserve policymakers on Monday laid the groundwork for a third round of bond purchases, saying the US recovery was weak and unemployment far too high.
Minutes from the Fed's June meeting released on Wednesday will be closely watched for signs of a growing consensus for further stimulus.