Interest rates fell Tuesday in the bond market, a day after yields reached their highest levels since October 2008.
The yield on the 10-year Treasury note fell to 3.98 percent in afternoon trading from 3.99 percent, a day after briefly climbing above 4 percent for the first time since June. The yield is now nearly as high as it was just before the credit crisis erupted late in 2008.
The price of the 10-year note maturing in February 2020 rose 3/32 to 97 5/32. The 10-year note yield is often used as a benchmark for interest rates on consumer loans.
The drop in yields comes as the government sold $40 billion in three-year notes. Prices slightly eased off their highs after the afternoon auction, which drew about the same demand as auctions for notes with similar maturities in recent months.
The bid-to-cover ratio, a measure of demand, was 3.10. It was 3.13 for $40 billion in three-year notes sold last month.
The yield on the three-year note maturing in March 2013 fell to 1.73 percent from 1.75 late Monday. Its price rose 1/32 to 98 31/32.
Tuesday's rise in bond prices was somewhat unusual because investors usually sell off Treasurys ahead of auctions in hopes of pushing yields higher. However, yields already trending higher in recent days, investors found enough value in the bond market to buy up Treasurys ahead of the auction.
Weak demand at recent auctions had been one of the primary reasons interest rates have climbed and bond prices have fallen in recent weeks. Mounting evidence that the economy is steadily recovering has also driven interest rates higher.
Investors are concerned about the record amount of debt the government has been issuing to help stimulate the economy leading to oversupply of bonds. A stronger economy can also lead to inflation, which would require the Fed to raise borrowing costs.
In other trading, the yield on the two-year note that matures in March 2012 fell to 1.16 percent from 1.18 percent. Its price rose 1/32 to 99 22/32.
The yield on 30-year bond that matures in February 2040 was unchanged at 4.84 percent. The price fell 7/32 to 96 13/32.
The yield on the three-month T-bill that matures July 1 rose to 0.17 percent from 0.16 percent.
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