Treasurys rally after auction

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NEW YORK (CNNMoney.com) -- Treasurys advanced Thursday as investors responded to another strong auction of U.S. debt.

The Treasury Department offered $11 billion in 30-year notes Thursday in the last of three auctions this week. The auction drew more than $26 billion worth of bids for the $11 billion of debt offered, for a bid-to-cover ratio of 2.4 - a signal that the sale was well received.

Thursday's auction came after the government offered $34 billion in 3-year notes Tuesday and $18 billion in 10-year notes Wednesday.

While this week's auctions have done relatively well, many analysts worry that the record amounts of government debt coming to the market will eventually overwhelm demand and push prices lower.

The auctions are part of the government's plan to issue between $2.7 trillion and $4.2 trillion of debt over the next two years to finance its economic and financial rescue plans. The government is set to pay $787 billion for stimulus, $700 billion for the bank bailout and trillions more in various liquidity programs.

"It's a question of supply," said Peter Cardillo, chief market strategist at Avalon Partners in New York. The market is also responding to an upbeat report on retail sales, he said.

A smaller-than-expected drop in retail sales helped send stock prices higher in afternoon trade. The rally came despite a downgrade of General Electric's (GE, Fortune 500) pristine credit rating. Wall Street ended the day higher Thursday, marking a rare three-day streak of gains for the stock market.

Prices for Treasury bonds, which are considered one of the most secure assets available, often climb when stock prices fall as demand for safety outweighs investors' tolerance for risk.

"Market psychology is finally beginning to change," Cardillo said about the stock market. "I'm not sure this signals a long-term climb, but I don't think the market is headed to new lows."

Treasury prices: The benchmark 10-year note was up 15/32 to 99 3/32 and its yield fell to 2.86% from 2.91% Wednesday. Bond prices and yields move in opposite directions.

The 30-year bond rallied 29/32 to 97 30/32 with a yield of 3.62%.

The 2-year note edged up 1/32 to 99 24/32 and yielded 1.02%.

The 3 month bill yielded 0.20%.

Lending rates: The 3-month Libor rate eased to 1.32% from 1.33% Wednesday, according to data on Bloomberg.com. The overnight Libor rate held steady at 0.33%.

Libor, the London Interbank Offered Rate, is a daily average of rates that 16 different banks charge each other to lend money in London.

One credit market gauge was unchanged and another reflected slightly tighter credit markets. The "TED" spread widened to 1.12 percentage points from 1.10 percentage points Wednesday. The more wide the TED spread, the less willing investors are to take risks.

The Libor-OIS spread was unchanged at 1.07 percentage points, even with the prior day. A narrower spread indicates that more cash is available for lending.