Overall demand was weaker than at a similar auction in June, and foreign investors appeared to buying fewer notes.

The government is relying on central banks around the globe to buy its debt and help fund its economic stimulus programmes, so a drop off in foreign demand is worrisome.

The price of the two-year note, which had been holding steady ahead of the auction, turned lower following the announcement of the results, while longer-term Treasurys came off their earlier highs.

The auction's bid-to-cover ratio, a measure of demand, was 2.75 per cent compared with 3.19 per cent at an auction of two-year notes in June.

Indirect bids, an indication of foreign buying, dropped to 32.97 per cent of the total bids accepted from 68.74 per cent in June.

"As of this moment, the safe havens are not as attractive," said Jessica Hoversen, a fixed-income and foreign-exchange futures analyst with MF Global in Chicago. "I think the market is still very cautious and there are still questions over economic growth, but people are more willing to take risk now than they were back in the fall or even in the first quarter of this year."

Early afternoon trading

In early afternoon trading, the two-year note slipped 3/32 to 100 2/32, while its yield rose to 1.10 from 1.05 per cent late Monday.

The benchmark 10-year Treasury note rose 1/32 to 95 5/32. Its yield fell slightly to 3.72 per cent from 3.73 per cent.

The 30-year bond rose 12/32 to 94 10/32, and its yield fell to 4.60 per cent from 4.63 per cent.

The yield on the three-month T-bill was unchanged at 0.18 per cent.

The auction came at the start of a week of record Treasury note issuance, in which the government is auctioning off US$205 billion of debt.

Investors fear that the vast amounts of debt being issued by the government to fund its economic stimulus programmess will outrun demand.

That in turn would force the government to increase the returns on bonds to make them more attractive to investors, and the higher yields will affect interest rates throughout the economy.

Long-term Treasury yields are tied closely to interest rates on mortgages and other consumer loans, so a spike in rates could saddle consumers with higher borrowing costs at a time when rising unemployment and the recession are putting a strain on their finances.

Well-received auctions

Earlier in the day, the Treasury issued US$30 billion of one-month bills and $27 billion of one-year bills. Both auctions were well received, particularly the one-year bills that saw solid demand from foreign investors, said Tom di Galoma, head of fixed income rates trading at Guggenheim Partners.

That followed auctions on Monday of three and six-month bills, and 20-year Treasury Inflation-Protected Securities, or TIPS, that were met with decent demand.

Nonetheless, Treasury prices slipped Monday because of fears that auctions of longer-term Treasurys later in the week won't see as much demand.

Investors tend to put more weight in auctions of longer-term Treasurys rather than bills, since those auctions are weekly.

The mixed trade in Treasurys Tuesday came amid a moderate sell-off in stocks, which was sparked by a weaker-than-expected reading on consumer confidence.

The market sees a drop in consumer confidence as troubling because that means Americans are likely still keeping their spending in check. Consumer spending makes up more than two-thirds of US economic activity.

Analysts have been anticipating a pullback in stocks after major indicators jumped 11 per cent in just two weeks, driven by a stream of better-than-expected corporate earnings reports.

- AP