Bonds fall, pulling yields off 7-week lows

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NEW YORK (Reuters) -- U.S. Treasurys fell Thursday, pulling benchmark yields off seven-week lows, as firming stock prices dimmed the allure of safe-haven bonds and the government's 30-year debt auction weighed further.

Results at the $11 billion auction of 30-year bonds were mixed overall, but there were signs of strength that might comfort investors who have been swamped by the massive $2 trillion worth of new debt hitting the market this year.

Auctions of 10- and 30-year bonds have been the source of increasing concern by fixed-income investors since questions over the longevity of the United States' prized AAA credit rating emerged back in May.

"It seems like a fair auction," said Andrew Brenner, senior vice president at MF Global in New York.

The 30-year Treasury bond traded down 2-7/32 in price, yielding 4.33%compared with 4.19% at Wednesday's close. Before the auction, long bonds were down 1-19/32.

Treasury's sale of previously issued 30-year bonds attracted reasonable demand overall, reflected in the bid-to-cover ratio of 2.36 from the 2.37 average of the last seven reopenings.

Benchmark 10-year Treasury notes were down 26/32 in price at 97-22/32 following the previous session's rally. Their yield, which moves inversely to the price, was 3.41% compared with 3.31% late Wednesday.

The 2-year note fell 1/32 to trade at 100-12/32, and its yield ticked up to 0.94%.

The 3-month bill yielded 0.18%.

Yields came in slightly above market expectations, suggesting that dealers were surprisingly aggressive at bidding down prices, though a recent bond-market rally may have left them more motivated than usual to push for higher rates.

However, foreign and institutional interest appeared spectacular when measured by the indirect bidding category, which accounted for just over half of the debt sold.

This would be an extraordinary result for any government debt auction, but especially for long bonds.

"Highest indirects ever for bonds," said MF Global's Brenner.

A note of caution is in order, analysts said, since recent changes to indirect bid calculations appear to have boosted that category at debt auctions. Markets have viewed the numbers skeptically, though they have not written them off entirely.