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Treasuries rose, following European government debt higher, even after the U.S. sold $24 billion of three-year notes at the highest yield since March.
Yields on benchmark U.S. 10-year notes fell as German 10-year yields dropped to a record low. The moves came a day after Fed Chair Janet Yellen emphasized plans to raise interest rates gradually in a speech and didn't provide specific guidance on timing.
The three-year debt sold for less than the price indicated by pre-auction trading. What's more, investors entered the smallest amount of bids directly with the Treasury since 2009, indicating "tepid" demand, according to Stone & McCarthy Research Associates.
That's a sign investors may see higher risk of a rate increase than market prices indicate.
The probability of a rate boost at the Fed's meeting next week has cratered since a weaker-than-forecast June 3 labor report sparked the biggest rally in two-year notes since September.
"A rich market got richer this morning, and bidders decided to hold off," Jim Vogel, head of interest-rate strategy at FTN Financial in Memphis, Tennessee, wrote in a note to clients following the auction.
Tuesday's note sale, the first of three Treasury offerings this week totaling $56 billion, comes after demand rose to the highest on record at a string of blockbuster auctions last month.
Investors have been snapping up U.S. securities amid worldwide demand for the safest fixed-income assets as more than $10 trillion of global debt offers negative yields, according to Fitch Ratings.
Benchmark Treasury 10-year yields fell three basis points, or 0.03 percentage point, to 1.71 percent as of 2:47 p.m. in New York, according to Bloomberg Bond Trader data. The price of the 1.625 percent security maturing in May 2026 was 99 1/4. The yield climbed four basis points Monday.
The three-year notes auctioned Tuesday yielded 0.93 percent, compared with a 0.928 percent yield in when-issued trading immediately before the sale.
In addition to Tuesday's auction, the U.S. will sell $20 billion in 10-year notes Wednesday and $12 billion in 30-year bonds June 9.
Last month's auctions of two-, five- and seven-year debt all sold at levels above prices indicated in pre-auction trading. That's happened in only 12 percent of auction weeks since 2010, according to data from TD Securities.
The futures market implies an 18 percent probability of a rate increase by July and no chance of a move this month, according to futures data compiled by Bloomberg.
A day before the May jobs report, traders assigned a 22 percent chance to a June increase and a 55 percent probability of a hike by July.