U.S. Treasury bonds plummet after dismal auction

Thu Aug 11, 2011 1:53pm EDT

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NEW YORK Aug 11 (Reuters) - The U.S. Treasury suffered its worst long bond auction in 2-1/2 years on Thursday as foreign investors shunned it in the wake of a damaging budget battle and downgrade to the credit standing of the United States.

The sale was the first 30-year bond offering since Standard & Poor's stripped the United States of its AAA credit rating. It also took a hit from extreme levels of volatility sweeping through global financial markets.

Worries about the stability of French banks and a slowing U.S. economy have driven markets to extremes and made safe-haven Treasuries expensive despite S&P's downgrade.

Some decline in that fear on Thursday, however temporary it may be, appeared to hurt investor appetite for safe-haven debt. Also, the Federal Reserve's decision earlier this week to keep short-term rates near zero for two more years may have affected bond pricing across different maturities.

"Horrible auction," said William O'Donnell, head of interest-rate strategy at RBS Securities in Stamford, Connecticut. "It may be a while before the markets get 30-years priced on the curve appropriate to the Fed's actions earlier this week."

Oddly, the 30-year sale followed a robust reception for an auction of 10-year debt on Wednesday.

Investors submitted bids worth 2.08 times the amount of 30-year debt on offer, the lowest since February 2009.

A measure of foreign demand -- the indirect bidder category -- accounted for just 12 percent of the sale, the lowest since February 2008.

In the open market, the 30-year bond US30YT=RR lost 5 points in price immediately after the auction results were released. (Reporting by Burton Frierson and Richard Leong; Editing by Dan Grebler)

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