Treasury prices plunged Tuesday, sending yields higher, as positive news about the U.S. and German economies drew money into higher-risk investments such as stocks and European bonds.
A strong auction by Spain of short-term debt gave traders confidence that major European nations will avoid default. That helped lift demand for bonds issued by Italy and France, causing their borrowing costs to fall.
Traders are buying up shaky European debt to take advantage of sky-high yields. They expect that the bonds will continue recover their value as confidence returns to Europe. That would pull their yields back down to more normal levels.
Borrowing costs for many European nations remain perilously steep. Italy is paying 6.19 percent on 10-year debt. The yield could spike quickly above 7 percent, the level at which nations such as Greece and Portugal were forced to take bailouts.
U.S. stocks surged after news that homes are being built in the U.S. at the fastest pace since April 2010. A strong report on German business and consumer confidence contributed to the optimism.
The Treasury Department auctioned $35 billion of five-year notes priced to yield 0.88 percent, slightly less than the market yield at the time of 0.884 percent. The ratio of dollars bid to Treasurys sold, a proxy for demand at an auction, was weaker than average.
Analysts say trading activity has slowed as the Christmas holiday approaches. Thin trading can make market swings more volatile.
After the auction, the five-year yield fell to 0.857 percent.
The government's final auction this week will be the sale of $29 billion in seven-year notes on Wednesday.
The price of the 10-year Treasury note fell $1.03 per $100 invested at 3 p.m. Eastern time, boosting its yield to 1.93 percent from 1.81 percent late Monday.
The price of the 30-year Treasury bond fell $2.91 per $100 invested, pushing its yield up to 2.93 percent from 2.76 percent late Monday.
The yield on the two-year Treasury note rose to 0.27 percent from 0.23 percent late Monday.
The yield on the three-month Treasury bill fell near zero, from 0.01 percent late Monday. Its discount wasn't available.