UPDATE 1-Strong US 30-year Treasury auction sparks bond rally

Thu Dec 9, 2010 1:55pm EST

* Strong indirect bids behind strong demand for 30Y bonds

* Indirect bidding highest since Feb. 2006

* Yield comes in below expectations but higher vs November

(Updates with details, quotes, byline)

By Richard Leong

NEW YORK, Dec 9 (Reuters) - The $13 billion U.S. 30-year Treasury bond auction on Thursday fetched strong demand, soothing anxiety over flagging appetite for U.S. government securities and sparking a rally in the long bond.

The bid-to-cover ratio, a gauge of overall bidding, came in at 2.74, the highest in four months.

"A great, great auction to end the week and the recent outperformance in 30-years was a strong hint that buyers lurked," said William O'Donnell, head U.S. Treasury strategist at RBS Securities, in Stamford, Connecticut.

Thursday's 30-year sale completed this week's $66 billion in coupon-bearing supply. It followed a mediocre $21 billion sale of 10-year note on Wednesday and a disappointing $32 billion in three-year debt on Tuesday.

The vigorous bidding at the 30-year auction was led by indirect bidders that include foreign central banks and large investment funds. The Treasury awarded 49.5 percent of the bonds to this bidder category, which was the highest percentage since they were reintroduced in February 2006. [ID:nTAR000061]

Another sign of demand for the reopened 30-year issue was that the Treasury paid a lower-than-expected yield to dealers and investors.

The 30-year bond due Nov 2040 cleared at a yield of 4.41 percent US30YTWI=TWEB, about 0.05 percentage point below the level expected by traders shortly before the auction deadline at 1 p.m. EST (1800 GMT).

But the reopened yield was 0.09 percentage point higher than the level when the issue was originally sold in November.

In the open market, the 30-year bond US30YT=RR last traded up 1-4/32 points at a yield of 4.39 percent, down from 4.45 percent late on Thursday.

The 30-year yield touched 4.51 percent a day earlier, its highest since mid-May, during a vicious market sell-off spurred by inflation and deficit worries on a plan to extend federal tax cuts. For more, see [US/]

(Additional reporting by Chris Reese)

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