Treasurys rally after auction
U.S. debt prices rose after an $18 billion auction of 10-year notes and stocks ended the day slightly higher.
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NEW YORK (CNNMoney.com) -- Treasurys posted gains Wednesday after yet another massive auction of government debt and as stocks ended a choppy day of trade very slightly higher.
The Treasury Department offered $18 billion in 10-year notes Tuesday in the second of three auctions this week. The auction drew more than $38 billion worth of bids for the $18 billion of debt offered, for a bid-to-cover ratio of 2.14.
On Tuesday, the government auctioned off $34 billion in 3-year notes and will offer another $11 billion in 30-year notes on Thursday.
Stocks held modest gains to end the day up a few points following a rally in overseas markets. On Tuesday, stocks bounced off 12-year lows to book the largest advance of the year after Citigroup (C, Fortune 500) said it turned a profit in the past two months.
Bond prices were lower earlier in the session as traders anticipated the coming auction. "It's supply and the rebound in stocks," said Bill Larkin a fixed-income analyst at Cabot Money Management in Boston. That combination "takes the allure of bonds off the table," he said.
Treasurys, which are considered one of the safest assets available, tumbled Tuesday as investors sought higher returns in the stock market.
Supply: Bonds typically trade in a narrow range ahead of an auction, as investors wait to see how the market responds to a new dose of supply. Tuesday's auction received a healthy amount of open interest.
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.
Many analysts worry that demand for U.S. debt will wane as the government floods the market with supply. But this year's auctions have been well received, with the market absorbing a record $93 billion in debt in mid-February.
Still, many investors remain concerned that inflation, which undermines the value of fixed-income assets, could become a problem in the future.
Larkin said Wednesday's auction of 10-year notes and Thursday's offering of 30-year bonds could reflect how nervous the market is about rising prices, since longer-dated maturities are more sensitive to inflation.
"If we see healthy demand I think inflation expectations may need to be adjusted," he said.
Treasury prices: The benchmark 10-year note reversed course to rally 27/32 to 98 21/32 and its yield fell to 2.91% from 3.01% late Tuesday. Bond prices and yields move in opposite directions.
The 30-year bond jumped 1 5/32 to 97 4/32 and yielded 3.66%.
The 2-year note edged up 1/32 to 99 23/32 with a yield of 1.03%.
The 3-month bill yielded 0.23%.
Lending rates: The 3-month Libor rate was unchanged from Tuesday at 1.33%, according to data on Bloomberg.com. The overnight Libor rate also 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.
Two key gauges were unchanged. The "TED" spread was 1.10 percentage points, even with Tuesday. The bigger the TED spread, the less willing investors are to take risks.
The Libor-OIS spread was also unchanged from the prior day, sitting at 1.07 percentage points. The wider the spread, the less cash is available for lending. 
