Bonds rise after strong auction

Click the chart to view bond prices and yields.

Quick Vote

How much did you spend out of pocket for health care last year?

• Under $1,000
• $1,000 to $5,000
• $5,000 to $10,000
• More than $10,000

or View results

NEW YORK (Reuters) -- U.S. government bond prices shot higher Wednesday, pushing benchmark yields to seven-week lows, after the Treasury sold $19 billion worth of 10-year debt in an auction that attracted surprisingly strong demand.

Auctions of 10-year and 30-year bonds have increasingly been seen as tests of the government's long-term borrowing ability since investors started to question confidence in the United States' prized AAA credit rating back in May.

Treasury appeared to pass the test with flying colors at its reopening of previously issued 10-year notes, attracting robust demand with the help of weak stocks and worries that the worst recession in decades might not be easing soon.

"Basically the fear trade is raising its head," said David Dietze, chief investment strategist at Point View Financial Services in New York.

"The level of demand was firmer than people had expected. It seems like there is continuing strong demand for Treasurys and that is keeping a lid on yields."

The benchmark 10-year Treasury note was up 1-11/32 to 98-19/32, yielding 3.33%, versus 3.46% at Tuesday's close. Bond prices and yields move in opposite directions.

Benchmark yields fell as far as 3.28%, their lowest since May 21. The market was on track for its biggest day of gains since March 18, when the Federal Reserve ignited a powerful rally by announcing a $300 billion program of Treasury purchases.

The 30-year long bond gained 2-7/32 to 101-8/32 , pushing yields down to 4.18% from Tuesday's close of 4.31%.

The 2-year note was up 3/32 to trade at 100-13/32, and its yield slipped to 0.92% from 0.97%.

Long bonds were closing in on their best day of gains since the end of May and yields fell to seven-week lows.

They will also take center stage on Thursday, when Treasury auctions $11 billion worth of reopened long bonds.

The strong demand at the 10-year auction may bode well for Thursday's auction, though the current rally in bonds runs the risk of making the market appear expensive as that sale looms.

The 10-year auction attracted robust demand, reflected by the bid-to-cover ratio of 3.28, well above the average of the last six reopenings, which was just below 2.50.

Foreign and institutional interest also appeared strong as measured by the indirect bidding category, which came in above 40%, versus the average of about 23 in the last six reopenings.

Yields were well below market expectations, based on trading in the when-issued market just before the auction, another bullish sign emerging from the sale.

The auction was part of the $73 billion worth of debt securities the government is bringing to market this week, which coincided with a decidedly bond-positive environment.

Stocks have been subdued by worries over the second-quarter earnings outlook and suspicions that the much anticipated economic recovery of the second half of 2009 might not materialize have enhanced the allure of safe-haven government bonds.

"It started off with stocks being weak and a lot of people talking about bad earnings coming up," said Jeff Given, portfolio manager with MFC Global Investment Management in Boston.

"Then the auction came out much better than expected, especially for a reopening."