TREASURIES-Bonds gain after solid demand in 30-year auction

* 30-year bond sale met with solid demand

* Bargain-hunting emerges since average 10-year auction

* Fed buys $8.3 bln in government notes due 2016-17
(Adds economist’s comments, updates prices)

By Chris Reese

NEW YORK, Dec 9 (BestGrowthStock) – U.S. Treasuries rose in price
on Thursday, retracing a portion of a dramatic sell-off earlier
this week, after an auction of 30-year bonds was met with
strong demand.

The sale of $13 billion of reopened 30-year bonds was done
at a yield below the level trading on the open market,
indicating investors bid aggressively for the debt.

“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 of U.S. Treasury strategy
at RBS Securities Inc in New York.

Investors were particularly encouraged by hints of foreign
demand for the longer-dated U.S. debt. Indirect bidders, which
includes foreign central banks, purchased the largest
percentage of the debt sale since the 30-year bonds were
reintroduced in February 2006.

“Massive foreign buying on 30 years — demand was
excessive,” said Thomas di Galoma, head of fixed-income rates
trading at Guggenheim Securities in New York.

Bargain-hunters have emerged since Wednesday’s mediocre
10-year auction, assuaging some concern that investors had lost
confidence in U.S. government debt, analysts said.

Benchmark 10-year notes (US10YT=RR: ) on Thursday afternoon
were yielding 3.21 percent, down from a high yield of 3.34
percent in an auction of $21 billion of the reopened notes
Wednesday.

The bond market was pummeled earlier this week by inflation
and deficit fears after the announcement of a deal by President
Barack Obama and Republicans to extend federal tax cuts.

The market was oversold and due for a correction after the
sell-off, which pushed benchmark 10-year yields to six-month
highs, analysts said.

“The sell-off was overdone. We expect the market will rally
into year-end,” said Eric Van Nostrand, interest rate
strategist at Credit Suisse in New York.

Nostrand forecasts the 10-year note yield would fall to
2.90 percent by year-end, helped by a likely bond-friendly
policy statement from the Federal Reserve after its meeting
next week.

But Greg Faranello, head of global markets trading and
treasury at Espirito Santo Investment in New York, sees yields
renewing their rise, with 10-years possibly at 3.50 percent.

“There’s still some pain in the air,” Faranello said. “We
may not find that (support) base until 2011.”

Fed policymakers are scheduled to meet on Tuesday. They
will likely reiterate support for their controversial $600
billion bond purchase program, dubbed QE2.

This second round of quantitative easing, which began last
month, was intended to stimulate investment and to lower
unemployment. Critics charged QE2 damages the dollar and will
lead to an inflation surge once U.S. growth accelerates.

The U.S. central bank on Thursday bought $8.31 billion in
Treasuries due in 2016 to 2017.

“The Fed has offered little support for the long-end of the
curve in their on going (purchases) so the price movements
since mid-November have been violent and often at times out of
line with movement in the rest of the curve,” said Thomas
Simons, money market economist at Jefferies & Co in New York.

Treasury buyside investors are moving out the curve for
yield and with the recent selloff in bonds, demand intensified
in today’s auction,” Simons said.

Thirty-year bonds (US30YT=RR: ) on Thursday traded 28/32
higher in price to yield 4.40 percent, down from 4.46 percent
late Wednesday.
(Additional reporting by Richard Leong and Ellen Freilich;
Editing by xxx)

TREASURIES-Bonds gain after solid demand in 30-year auction