The Treasury Department auctioned ten-year notes at a record low yield Tuesday as Europe's ongoing financial problems kept demand strong for lower-risk investments.
Market prices for Treasurys already in circulation fell on new signals that Europe might help Greece avoid a default. The news lifted stocks and drew money out of Treasurys, which carry less risk.
The U.S. government sold $21 billion of 10-year Treasury notes at a yield of 2 percent, the lowest auction yield on record. The market yield on 10-year notes fell below that level often in recent weeks as fears grew about the unstable global economy and Greece's shaky finances.
At 4:25 p.m. Eastern time, the 10-year yield rose to 1.99 percent from 1.95 percent late Monday. Its price fell 41 cents for every $100 invested.
Greece is relying on financial lifelines from its European neighbors. Some are reluctant to continue the bailouts because Greece failed to meet deficit-cutting goals.
A default by Greece could be catastrophic for the global economy. Talk of a possible a Greek bankruptcy Monday sent shares tumbling and pushed the 10-year yield down to 1.87 percent, the lowest since the Federal Reserve Bank of St. Louis started keeping records in 1962. Bond yields fall as their prices rise.
Stock markets recovered on Tuesday after German Chancellor Angela Merkel said Europe should try to help Greece regain its financial footing. She dismissed suggestions that Greece might have to file for bankruptcy protection.
That hint of optimism pushed Treasury prices lower and yields higher. David Coard, head of fixed income solutions and strategy at The Williams Capital Group, a New York investment bank, said it probably won't last. Coard said traders have overreacted to news about Europe's debt crisis for more than a year, but the threat remains.
"It gets into the spotlight, we run around like chickens without their heads, then something is said or done to soothe us and it recedes into the background and everything is OK _ until the spotlight is shone again," he said.
The possibility of a default by Greece is unlikely to force European leaders toward a solution that would help the market, Coard said. "It doesn't seem like there's a magical salve out there that's able to make investors feel more comfortable" for more than a few days, he said.
Bankruptcy protection would allow Greece to cancel some of its debts. But it would threaten big banks in Greece, France and Germany that lent billions to the Greek government. Bonds held by those banks would lose much of their value.
The result could be a financial crisis like the one that seized the U.S. after Lehman Bros. failed three years ago this week. Those fears are likely to keep weighing on Treasury yields this fall, analysts say.
The yield on the 30-year Treasury bond rose to 3.33 percent from 3.25 percent late Monday. Its price fell $1.59 per $100 invested.
The yield on the two-year Treasury note fell to 0.21 percent from 0.22 percent late Monday.
The yield on the three-month T-bill was roughly flat at 0.01 percent. Its discount wasn't available.