Treasurys Surge After Strong Auction

U.S. government bonds surged on Wednesday, sending benchmark yields to 6-1/2 week lows, after the Treasury sold $19 billion worth of 10-year debt in an auction that attracted surprisingly strong demand.

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

The reopening of previously issued 10-year notes attracted robust demand, reflected by the bid-to-cover ratio of 3.28.

Foreign and institutional interest appeared strong measured by the indirect bidding category, which came in above 40 percent.

Yields came in well below market expectations.

The benchmark 10-year Treasury note was last up a full point on the day, yielding 3.338 percent, versus 3.46 percent at Tuesday's close. Before the auction it was up just 12/32.

The 10-year yield is at its lowest since late May and well below the eight-month high of 4.00 percent reached more than three weeks ago.

Stocks losses and worries over a protracted recession have boosted appetite for $43 billion in Treasury coupon securities at two auctions earlier this week, investors said.

"The market is absorbing the supply pretty well. There's still a lot money on the sidelines, and there's still a lot of nervousness about the economy," said James Swanson, portfolio manager with MFS Investment Management in Boston.

The U.S. Treasury Department is selling a total of $73 billion in longer-dated debt this week.

Uneasiness the recession could linger through year-end has revived speculation the government may launch a second stimulus package. That has ignited concerns federal borrowings could balloon, resulting in more Treasury issuance that erodes their value, according to analysts.

For now, however, investors have not shied from Treasurys, and weakness in stocks Wednesday encouraged buying of Treasurys.

The 30-year bond yield declined to 4.26 percent, almost a seven-week trough.

Major U.S. stock indexes were down 0.4 to 0.7 percent in Wednesday trading.

Supply Cloud

The Treasury already is expected to sell $2 trillion in new debt this fiscal year to finance the first stimulus program and various bailouts.

Last week's disappointing U.S. jobs data led some investors to downgrade their economic outlook and renew expectations the Federal Reserve will cling to its near-zero rate policy at least through the remainder of the year, analysts said.

The payroll report "signals a sea-change in investor sentiments. Market participants are reevaluating the timing and strength of a rebound," said James DeMasi, chief fixed-income strategist at Stifel Nicolaus in Baltimore.

While the latest U.S. labor data has darkened the market's outlook, an International Monetary Fund report Wednesday was slightly more upbeat than the fund's last assessment in April.

The IMF said it expected the global economy to contract 1.4 percent this year, just a tad steeper than the 1.3 percent fall it forecast in April. But it upgraded its 2010 world growth forecast to 2.5 percent from 1.9 percent three months ago.

This week's Treasury auctions will conclude Thursday with a $11 billion reopening of an older 30-year bond issue.

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