July 7 (Bloomberg) -- Treasuries rose, with the 10-year yield touching the lowest in more than a month, as investors speculated the worst recession in 50 years has further to run, tempering concern record U.S. borrowing may outstrip demand.

U.S. debt gained as the U.S. sold $35 billion of three-year notes at the lowest yield since May. The auction is the second of a record four this week totaling $73 billion and stocks fell. An adviser to President Barack Obama said the economy is “worse than we forecast” and the government should consider drafting a second stimulus package.

“There was still high demand, but at higher yields,” said George Goncalves, chief fixed-income rates strategist at Cantor Fitzgerald LP, one of 16 primary dealers required to bid at Treasury auctions. “The economy is still very weak, and the future is uncertain. All the indecision bodes well for the long end.”

The yield on the benchmark 10-year note fell six basis points, or 0.06 percentage point, to 3.45 percent at 4:26 p.m. in New York, according to BGCantor Market Data. The yield touched 3.439, the lowest since May 26. The 3.125 percent security maturing in May 2019 rose 15/32, or $4.69 per $1,000 face amount, to 97 9/32.

The 30-year bond yield fell five basis points to 4.31 percent.

The Long End

“The longer end can still benefit as stocks are still not doing well and if you’re going to take your money out of risks assets you’re going to put it in the long end,” Goncalves said.

The three-year notes yielded 1.519 percent at today’s sale, the lowest since garnering 1.473 percent at the May 5 auction. The last sale, a $35 billion offering on June 9, drew a yield of 1.96 percent, the highest since May 7, 2007.

U.S. securities rose as Standard & Poor’s 500 Index declined 0.8 percent. The S&P 500 has fallen 6 percent since June 12 as the rebound in the index from a 12-year low in March outpaced prospects for a recovery in the economy and the longest stretch of declining profits on record. The index had gained as much as 40 percent during the rally before the recent drop.

“There’s a good flight-to-quality bid in the market, but supply is growing,” said Jeffry Feigenwinter, head of Treasury trading in New York at primary dealer BNP Paribas Securities.

Today’s so-called bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.62. At the June sale it was 2.82, compared with an average of 2.53 for the eight sales since the Treasury began selling the notes in November after an 18-month hiatus. An investor class that includes foreign central banks bought 54 percent of the notes offered, more than the 43.8 percent at the last auction of the securities.

‘A Bit Too Small’

The U.S. should consider drafting a second stimulus package focusing on infrastructure projects because the first plan was “a bit too small,” said Laura Tyson, an adviser to Obama.

The current plan “will have a positive effect, but the real economy is a sicker patient,” Tyson said in a speech in Singapore today. She stressed that she was speaking for herself and not the administration. The $787 billion package will have a bigger effect in the third and fourth quarters, she said.

Her comments contrast with remarks made two days ago by Vice President Joe Biden and fellow Obama adviser Austan Goolsbee, who said it was premature to discuss crafting another stimulus because the current measures have yet to fully take effect.

Signs of an economic recovery may be fleeting after the Labor Department said last week that the unemployment rate rose to 9.5 percent, the highest since 1983.

‘Pistol In My Ear’

Pacific Investment Management Co.’s Paul McCulley said if a second U.S. stimulus package is passed, it must be guided by longer-term fiscal responsibility.

“I have difficulty coming down table pounding saying we need another stimulus package, but if you put a pistol in my ear I would say yes, but,” McCulley said in an interview today with Bloomberg Radio from Newport Beach, California. “It has to be in the context of a plan, not just a platitude, but a plan for fiscal responsibility.”

McCulley and his colleagues at Pimco, the manager of the world’s largest bond fund, have called for the U.S. government to place a greater emphasis on fiscal responsibility as it borrows unprecedented amounts to stimulate the economy and service deficits.

The Treasury is holding four auctions of coupon-bearing debt in a single week for the first time since it began selling securities regularly in 1976. The government is increasing debt sales as the U.S. budget deficit approaches $1 trillion, the most since the Treasury Department started tracking the number in 1968.

$1.1 Trillion

After more than doubling note and bond offerings to $963 billion in the first half, another $1.1 trillion may be sold by year-end, according to Barclays Plc, another primary dealer. The second-half sales would be more than the total amount of debt sold in all of 2008.

Demand has been rising at U.S. debt auctions, especially from indirect bidders, the class of investors that includes foreign central banks. Those investors bought 49.7 percent of the $8 billion Treasury Inflation Protected Securities sold yesterday, compared with 26.2 percent in the prior auction in April.

Treasuries have lost 4.8 percent for the year and gained 0.4 percent in July, the first positive month since March, according to Merrill Lynch & Co.’s Treasury Master Index.

Two-year notes, more influenced by changes in the Federal Reserve’s benchmark rate, have outperformed longer maturities so far this month. The difference in yield, or spread, between 2- and 10-year Treasuries steepened to 2.61 percentage points yesterday, the most since June 19, based on intraday prices. The spread fell to 2.50 percentage points today.

The Fed cut its target for overnight lending between banks to a range of zero to 0.25 percent in December. Two-year notes yield 70 basis points more than the upper end of the Fed’s target interest-rate range, versus an average spread of 27 basis points for the past decade.

To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net; Cordell Eddings in New York at ceddings@bloomberg.net.

Last Updated: July 7, 2009 16:28 EDT