Treasurys rose Tuesday amid renewed caution about the speed and strength of an economic recovery. A successful auction of three-year notes reinforced demand for government-backed bonds.
The price of the three-year note rose 5/32 to 100 18/32 in late trading, sending its yield down to 1.18 percent, compared with 1.24 percent late Tuesday.
The government sold $40 billion in three-year notes to kick off this week's round of auctions. The government is set to sell $21 billion in 10-year notes on Wednesday and $13 billion in 30-year bonds on Thursday.
The bid-to-cover ratio, a measure of demand, was 2.98 in the latest auction of three-year notes. It was below the 3.33 ratio at an auction last month of notes with a similar maturity, but still above the 2.70 average seen across all three-year note auctions this year.
Treasurys had been rising throughout the day before the afternoon's auction as investors dumped riskier stocks in favor of the safety of government debt.
The Dow Jones industrial average and broader Standard & Poor's 500 index both dropped 1 percent after a weak earnings forecast from 3M Co. and McDonald's Corp. reported disappointing sales and worries about debt loads in several countries.
Reports of ongoing weakness in manufacturing in Britain and Germany provided further evidence a recovery in Europe is also fragile.
The dollar traded higher at the expense of stocks. When the dollar strengthens, it makes commodities more expensive for foreign buyers and hurts profits of companies with major international operations.
Concerns about debt from Greece and the Persian city-state Dubai also drove money into Treasurys. Moody's Investors Service cut its rating on six Dubai state-linked companies, while Fitch ratings downgraded Greece's debt over concerns about the government's ability to service its debt.
In other trading, the price of the 10-year note, a benchmark for many loans, rose 13/32 to 99 29/32. That sent its yield down to 3.39 percent, from 3.43 percent.
The 30-year bond rose 7/32 to 99 31/32. Its yield fell to 4.38 percent from 4.39 percent.
The yield on the three-month T-bill fell to 0.02 percent from 0.03 percent. Its discount rate was 0.03 percent.
The cost of borrowing between banks declined. The British Bankers' Association said the rate on three-month loans in dollars _ the London Interbank Offered Rate, or Libor _ fell to 0.2559 percent from 0.2566 percent.