NEW YORK | Tue Aug 9, 2011 9:06am EDT
(Reuters) - U.S. government debt prices fell on Tuesday as investors looked to the Federal Reserve for clues on whether it will offer more help for a flagging economy, and also prepared for $32 billion worth of three-year supply.
Early trading was volatile in heavy volume, as buying in the beaten down stock market and in other risky assets pared demand for Treasuries, German Bunds, gold and cash.
"It's a big volatile game right now. The bond market is reacting to the bounce back in stocks. People will be looking to the Fed later," said Justin Hoogendoorn, fixed income strategist at BMO Capital Markets in Chicago.
U.S. stock futures signaled a higher opening on Wall Street after suffering its biggest one-day drop since December 2008 during the global financial crisis. .N
Investor sentiment has been fractured by festering debt woes in Europe and Standard & Poor's stripping the United States of its AAA rating.
Confidence has flagged in government responses to avert a recession and to stem debt problems on both sides of the Atlantic from spiraling into a global crisis akin to the 2008-2009 credit crunch.
This intense anxiety has unleashed a massive sell-off in equities and a safe-haven stampede into Treasuries despite the S&P downgrade of the United States. The flood of money has driven short-dated U.S. yields to record lows.
Early Treasury trading volume is 85 percent above its 20-day average, according to bond broker ICAP.
The surge in Treasury appetite should buttress bidding at this week's $72 billion quarterly refunding, analysts said.
The refunding kicks off with a three-year debt auction at 1 p.m..
In "when-issued" trading, traders expect the new three-year issue due Aug 2014 to sell at a yield of 0.5050 percent, according to Tradeweb.
In the open market, two-year notes were down 1/32 in price for a yield of 0.28 percent, just above the Fed's current target of zero to 25 basis points on short-term interest rates.
The National Federation of Independent Business said on Tuesday its optimism index among small businesses fell to 89.9 in July from 90.8 in June.
In light of the economic and market fragility, traders are hoping that the U.S. central bank will assure markets by signaling it will take additional steps to stimulate the economy. This could include buying more long-dated bonds, signaling it would not raise short-term rates until 2013 and/or lowering the interest rates it pays banks on its excess reserves.
However, most Wall Street economists anticipate the Fed will refrain from announcing a third round of quantitative easing after completing QE2 at the end of June.
The Federal Open Market Committee will release a policy statement at about 2:15 p.m..
The 10-year Treasury note fell 24/32, its yield rising to 2.44 percent, erasing about 1/3 of the previous day's gain and an even smaller portion of the week's advance.
The 30-year bond last traded down 28/32 yielding 3.70 percent, up 4 basis points from late Monday. It touched 3.75 percent in overseas trading and hovered near its lowest levels since September 2010.