UPDATE 1-Foreign bids at U.S. 30 year bond sale assuage fears

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By John Parry

NEW YORK Aug 13 (Reuters) - Investors snapped up a record $15 billion auction of 30-year U.S. government bonds on Thursday, assuaging fears about the risk that foreign buyers may demand much higher yields at sales of longer maturities.

Overall, this week's sale of $75 billion in U.S. Treasury notes and bonds was a reassuring sign of the government's ability to continue issuing debt apace, tallying two strong auctions out of three, analysts said.

"After we had these auctions, it is a big relief to the market that we can go on and not worry until the next one comes," said William Larkin, portfolio manager with Cabot Money Management in Boston.

A pause in issuance of Treasury notes and bonds next week, after this week's record amount of issuance for a quarterly refunding, should potentially give the government bond market a firmer tone. But analysts warn that persistent fears of a spike higher in yields will dog the market.

Longer term, "there is concern they will not have success with one of these auctions and that this will have a negative effect on lending and on the stock market," Larkin said.

A bounce in government bond yields would push up borrowing costs for companies and homeowners, axing back corporate profits and potentially derailing any economic recovery.

As the most inflation-sensitive maturity and the most susceptible to a tide of government debt issuance, the long bond still makes many bond analysts nervous.

Inflation, which erodes bond values over time, is most pernicious to long maturity debt.

After its glittering performance last year, the 30-year has dealt big losses to those who bought it in December. The long bond's yield, which moves inversely to its price, has jumped near 4.5 percent now US30YT=RR from record lows near 2.5 percent in December.

CONFIDENCE BOOST, FOR NOW

For now, despite a soft auction of 10-year notes, the stellar 3-year notes sale earlier in the week and the solid 30-year auction on Thursday restored investors' faith that Treasuries yields could hold their near term ranges, analysts said.

"All things considered it was a good week and even considering the poor 10-year sale the market is going in the right direction for the buyers of the benchmark," said Mary Ann Hurley, senior Treasuries trader in Seattle at brokerage D.A. Davidson.

Midafternoon on Thursday, the 10-year note's yield, which moves inversely to its price, was at 3.60 percent US10YT=RR, down from 3.86 percent at the start of the week.

The ragged $23 billion 10-year notes sale on Wednesday US10YT=RR had hinted investors were starting to push for higher yields to compensate for the risks associated with a deluge of government debt issuance, expected to tally some $2 trillion this year.

Consequently, analysts had feared Thursday's 30-year sale might go poorly. But both overall demand and foreign participation in the auction were strong.

The bid-to-cover ratio, a broad gauge of demand, was 2.54 at the long bond sale, well above average for auctions of this type. Indirect bids, which include those from a critical group of buyers -- foreign central banks -- took 48 percent of the auction, also well above average.

Foreigners as a whole hold about half of U.S. Treasuries outstanding.

"It was a solid reception," said Ian Lyngen, senior government bond strategist with CRT Capital Group in Stamford, Connecticut. Bidding was generally brisk, "and we also had a strong indirect bid," he said.

"There was a good reception, and the 30-year sector of the market is certainly taking it as such," Lyngen added.

After the sale, in the open market, the 30-year bond US30YT=RR gained nearly two full points in price, pushing its yield down to 4.43 percent. (Editing by Leslie Adler)