Interest rates dipped in the market for previously issued Treasurys Tuesday after a successful auction of $42 billion of five-year notes.
The yield on the 10-year Treasury note, which is used as a benchmark for interest rates on mortgages and other consumer loans, slipped to 3.80 percent from 3.85 percent Monday. Its price rose 12/32 to 96 17/32 in late trading.
Meanwhile, the yield on previously issued five-year notes fell to 2.57 percent from 2.60 percent. Its price rose 5/32 to 97 31/32.
In the auction, the second big debt sale by the government this week, the measure of demand known as the bid-to-cover ratio was 2.59. That was slightly less than at a similar auction last month, but in line with the recent average, said Matt Freund, vice president of fixed income investments at USAA Investment Management Co.
Demand was good for such a slow week of trading, he said. Many investors are taking vacation this week between Christmas and New Year's Day.
Auctions have continued to go smoothly this year despite worries that the massive amounts of supply would overwhelm demand.
"I think it's just the market breathing a big sigh of relief," Freund said. "If it did not go well, it would have been a much bigger story."
The auction of five-year notes came a day after a solid reception for $44 billion of two-year notes. The Treasury Department is issuing a total of $118 billion of debt this week as part of its ongoing efforts to fund its stimulus programs. On Wednesday, the government will auction $32 billion of seven-year notes.
Bond yields have surged this month as investors grow more confident about the economy. The yield on the 10-year note has jumped more than 60 basis points, or 0.6 percentage point, since the end of November. A healthy economy means a greater potential for inflation and higher interest rates, both of which are bad for bonds.
"Folks are realizing that inflation risks are growing and they have to be compensated for that," Freund said. However, he believes bonds may have sold off more than warranted and that prices may stabilize in the coming weeks.
In other trading, the yield on the two-year note rose to 1.09 percent from 1.05 percent. Its price edged up 1/32 to 99 26/32.
The price of the 30-year bond rose 26/32 to 95 23/32. Its yield fell to 4.64 percent from 4.69 percent.
The yield on the three-month T-bill was flat at 0.09 percent. Its discount rate also was 0.09 percent.
The cost of borrowing between banks was unchanged. The British Bankers' Association said the rate on three-month loans in dollars _ the London Interbank Offered Rate, or Libor _ was flat at 0.2506 percent.