Nov. 23 (Bloomberg) -- Treasuries were little changed after the U.S. sold a record-tying $44 billion of two-year debt at the lowest yield ever, the first of three note sales this week totaling a record $118 billion.

The securities drew a yield of 0.802 percent, compared to the forecast of 0.786 percent in a Bloomberg survey of eight of the Federal Reserve’s 18 primary dealers and below the 0.922 percent drawn at an auction in December. Two-year yields last week fell to the lowest level this year as the Federal Reserve signaled it may keep interest rates near record lows for longer.

“It’s a pretty good result considering the large rally we’ve had in the front end and it being a light-volume day ahead of the holiday,” said Carl Lantz, an interest-rate strategist in New York at Credit Suisse Securities USA LLC, one of 18 primary dealers required to bid at Treasury auctions. “There’s been a shift in rhetoric from the Fed. They’re sounding quite a bit more dovish than they had just a few weeks ago.”

The yield on the current two-year note traded at 0.73 percent at 4:25 p.m. in New York, according to BGCantor Market Data. The 1 percent security maturing in October 2011 was at 100 1/2.

The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.16, compared to 3.63 at the previous auction and an average of 2.92 at the last 10 auctions.

Indirect bidders, a class of investors that includes foreign central banks, purchased 44.5 percent of the notes today, the same as at the October sale. The average for the past 10 sales was 44 percent.

‘Extraordinary Stimulus’

The record low auction yield speaks “more than anything else about the state of Fed policy and the belief on the part of many that extraordinary stimulus is likely to remain in place for a considerable period of time, perhaps through next year,” said William O’Donnell, U.S. government bond strategist at primary dealer RBS Securities Inc. in Stamford, Connecticut. “That makes it easier for the so-called carry-crowd to come in and buy two-year notes with the belief that the Fed’s not going to act against them any time soon.”

Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., increased his holdings of government debt to 63 percent, the highest amount in at least five years.

Gross boosted his $192.6 billion Total Return Fund’s investment in Treasuries, so-called agency debt and other U.S. government-linked bonds from 48 percent of assets in September, according to Pimco’s Web site.

Seven-Year Sale

Earlier today the Treasury sold $31 billion of six-month bills at a yield of 0.14 percent, the lowest since at least 1994. It also sold $30 billion of three-month bills at a yield of 0.04 percent, the lowest since Dec. 22, 2008, which followed the Fed’s Dec. 16, 2008 decision to lower borrowing costs to near-zero and its announcement that it was considering buying Treasuries.

The size of today’s two-year offering matched the record set last month. The Treasury is scheduled to sell $42 billion of five-year securities tomorrow and $32 billion of debt maturing in seven years on Nov. 25, both record amounts.

“The one that may be a bit more difficult is the seven- year, given that it’s on a Wednesday before Thanksgiving, and you have the Fed no longer buying the sector,” said Dan Orlando, head of U.S. government bond trading at Deutsche Bank Securities Inc. in New York, a primary dealer.

The central bank completed its $300 billion in purchases of Treasuries last month, after announcing the program in March. The Fed said on Nov. 4 that it will acquire a total of $1.25 trillion of agency mortgage-backed securities through the first quarter of next year and reiterated that interest rates will stay at almost zero for “an extended period.”

Great Depression Buff

For the first time in seven decades, Treasury bills are paying no interest while stocks continue to appreciate -- a divergence that might be perilous if Federal Reserve Chairman Ben S. Bernanke didn’t know all about 1938.

That’s when the Standard & Poor’s 500 Index climbed 25 percent even as bill rates tumbled to 0.05 percent from 0.45 percent. In 1939 stocks began a three-year, 34 percent decline after the Fed increased borrowing costs prematurely to stymie inflation that never materialized.

While almost no one expects Bernanke, a self-described “Great Depression” buff, to raise rates before mid-2010, bond investors say with unemployment above 10 percent and housing taking another downturn, they have no qualms about lending the government money for nothing to ensure their capital is preserved. Stock investors, meanwhile, say the worst is over and that low borrowing costs coupled with the $12 trillion of fiscal and monetary stimulus will bolster earnings.

The three-month bill rate rose one basis point, or 0.01 percentage point, to 0.014 percent, according to Bloomberg data, after turning negative on Nov. 19 for the first time since last year’s credit freeze.

To contact the reporters on this story: Daniel Kruger in New York at dkruger1@bloomberg.net.

Last Updated: November 23, 2009 16:27 EST