June 9 (Bloomberg) -- Treasury notes rose as yields near the highest level since November helped spur investor demand at the government’s record-tying auction of $35 billion of three- year securities.

Thirty-year debt fell as traders prepared for the sale of an additional $30 billion in notes and bonds in the next two days. Today’s sale drew a yield of 1.960 percent, lower than forecast in a Bloomberg News survey. Short-term Treasuries earlier snapped a three-day decline as Wall Street firms that trade directly with the Federal Reserve say speculators betting that interest rates may head higher this year are wrong.

“It was a very well bid auction,” said John Spinello, chief technical strategist in New York at Jefferies Group Inc., a brokerage for institutional investors. “With deficits where they are, there is much more risk” with longer-maturity debt.

The two-year note yield fell 10 basis points, or 0.10 percentage point, to 1.30 percent at 5:02 p.m. in New York, according to BGCantor Market Data. The 0.875 percent security maturing in May 2011 rose 6/32, or $1.88 per $1,000 face amount, to 99 5/32. The yield touched 1.43 percent yesterday, the highest level since Nov. 5.

The 30-year bond yield gained four basis points to 4.66 percent.

Investor Demand

Shorter-maturity notes tend to track the central bank’s target for overnight lending between banks, while longer maturities are more influenced by inflation.

Today’s auction was anticipated to draw a yield of 1.971 percent, according to the average forecast in a Bloomberg survey of nine bond-trading firms. The last auction, on May 5, drew a yield of 1.473 percent.

The bid-to-cover ratio, which gauges demand by comparing the number of bids with the amount of securities sold, was 2.82 today, compared with 2.66 in May and an average of 2.49 for the seven sales since the Treasury began selling the notes in November after an 18-month hiatus.

Indirect bidders, the class of investors that includes foreign central banks, bought 43.8 percent of the notes at today’s sale. That compared with 37.3 percent of the notes at the May auction and an average 37.2 percent at the past seven auctions.

The Treasury is scheduled to sell $19 billion of 10-year debt tomorrow and $11 billion of 30-year bonds on June 11.

‘Harder to Do’

“It was a good auction,” said Arthur Bass, a managing director of derivatives in New York at the brokerage Newedge USA LLC. “I have a hard time being super-bullish because there are two auctions ahead of us. Longer-end auctions are harder to do.”

Two-year yields climbed 44 basis points in the past two days as Fed funds futures contracts showed increased probability of a rate increase by November on signs that the economy is bottoming.

Policy makers will keep the target for overnight loans between banks in the current range this year, according a survey of the 16 primary dealers that trade with the central bank. A majority predict no increase until at least the second half of 2010.

Traders see a 45 percent chance the Fed will raise its target rate at its November meeting, based on futures traded on the Chicago Board of Trade. The odds were 26 percent a week ago.

‘Market Seems Wrong’

“The market seems wrong on this one,” said Eric Liverance, head of derivatives strategy in Stamford, Connecticut, at primary dealer UBS AG. “High unemployment and a continued bad housing market will prevent the Fed from raising rates.” UBS predicts the central bank will remain on hold until June 2010.

Treasuries have fallen 6.4 percent this year, according to Merrill Lynch’s U.S. Treasury Master Index, as President Barack Obama borrows record amounts to stimulate the economy. The securities haven’t posted an annual decline since 1998, according to the index.

The government may borrow $3.25 trillion in the fiscal year ending Sept. 30, almost four times the $892 billion in 2008, according to primary dealer Goldman Sachs Group Inc. The budget deficit is projected to increase to $1.85 trillion in the year ending Sept. 30, equivalent to 13 percent of the nation’s economy, according to the nonpartisan Congressional Budget Office.

Obama signed a $787 billion, two-year economic stimulus plan in February. The Fed pledged to buy up to $300 billion in Treasuries and $1.25 trillion of bonds back by home loans. All told, the government and the central bank have spent, lent or committed $12.8 trillion, an amount that approaches the value of everything produced in the country last year, to stem the longest recession since the 1930s.

‘Gone Is Any Notion’

“Gone is any notion that the Fed is ready to hike rates,” said Joseph Balestrino, a money manager at Federated Investors in Pittsburgh, which oversees $21 billion in bonds. He spoke in an interview on Bloomberg Television. “There’s an awful lot needs to be done before that -- remove all the quantitative easing, even cut back on the stimulus -- so we think monetary policy is off the table for a good year or more.”

The difference in yield between 2- and 10-year yields rose 10 basis points to 2.55 percentage points. It touched a record 2.81 percentage points last week as investors bet the Fed wouldn’t keep its target interest rate near zero indefinitely. Policy makers cut their target to a range of zero to 0.25 percent in December.

Shorter-maturity U.S. debt outperformed longer maturities. Notes due in three years or less fell 0.7 percent this year compared with a 27 percent decline in 30-year Treasuries, according to Merrill Lynch & Co. indexes.

To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net; Daniel Kruger in New York at dkruger1@bloomberg.net.

Last Updated: June 9, 2009 17:06 EDT