Sept. 12 (Bloomberg) --Treasury 10-year notes posted a fifth week of gains after the relative value of U.S. government debt helped fuel demand at auctions of $70 billion in bonds and notes and a report showed consumer spending remains soft.

Ten-year note yields touched their lowest level in almost two months yesterday as each of the three securities sold this week yielded less than the average estimate in Bloomberg News surveys of the primary dealers that are obligated to bid. Reports next week are forecast by analysts to show that inflation is subdued and retail sales increased last month after unexpectedly declining in July.

“The bond market is still questioning the V-shaped recovery,” said Suvrat Prakash, an interest-rate strategist in New York at BNP Paribas Securities Corp., one of the 18 primary dealers required to bid at Treasury auctions. “We are looking forward to next week where we have a lot of economic data, which should provide some clarity for the market.”

The yield on the benchmark 10-year note fell eight basis points, or 0.08 percentage point, to 3.36 percent the past five days, according to BGCantor Market Data. The price of the 3.625 percent security maturing in August 2019 rose 22/32, or $6.88 per $1,000 face value to 102 7/32. The yield touched 3.27 percent yesterday, the lowest since July 13. The rally equaled the longest since the five-week period ended July 10.

The yield on the 30-year bond fell nine basis points to 4.18 percent on the week after the $12 billion of the securities offered on Sept. 10 drew the strongest demand in almost two years.

Auction Demand

Treasury sold $442 billion of notes and bonds this quarter after selling $963 billion in the first half of the year. Even with the added supply, Treasuries returned 1.8 percent since June, including reinvested interest, after losing 4.5 percent in the first half, Merrill Lynch index data show.

The auctions this week show the unprecedented amount of debt being sold to finance the record budget deficit is failing to curb investor demand.

“With stocks higher, a weak dollar combined with commodities prices heading higher you would think the Treasury would have had a hard time at the auctions,” said Larry Milstein, managing director of government and agency debt trading at RW Pressprich & Co., a fixed-income broker and dealer in New York for institutional investors. “Foreign buyers have kept up their buying.”

Relative Value

This week’s auctions kicked off with the sale of a record $38 billion in three-year notes on Sept. 8. The securities yielded 1.487 percent, the lowest level since May and below the average dealer forecast of 1.50 percent in a survey before the 1 p.m. bidding deadline.

A day later the government sold $20 billion of 10-year notes at a yield of 3.51 percent, compared with an average forecast of 3.53 percent. The 30-year bond auction drew a yield of 4.238 percent, below the 4.289 percent forecast.

“It would be hard to step in at these levels and buy but I wouldn’t be short Treasuries at this point,” said Milstein. “Their value is all relative.”

The spread between Fannie Mae’s current coupon 30-year fixed-rate mortgage securities and 10-year Treasuries narrowed to 94.7 basis points this week, compared with an average of about 104.6 basis points this year.

“The Treasury market is relatively cheap compared to other high grade bonds, corps, mortgages,” said David Ader, head of U.S. government bond strategy in Stamford, Connecticut, at CRT Capital Group LLC. “As we look to the source of buying in Treasuries when the fundamental news was mixed, we see that on a relative basis Treasuries are the least rich sector of the market.”

Overall Demand

The spread between AA-investment grade corporates and 10- year Treasuries was 2.07 percent today. The average for this year has been 3.151 percent.

The U.S. government is concerned about overall demand for Treasuries, not appetite from individual countries, said David Dollar, the U.S. Treasury Department’s economic and financial emissary to China.

“The interest rate on long-term Treasury bonds is at a very low level by historical standards,” Dollar said at the World Economic Forum meeting yesterday in Dalian, China. “That says that the market has confidence the U.S. will get the fiscal problem under control.” The U.S. government and the Federal Reserve have spent, lent or committed more than $12 trillion in a bid to revive the economy and credit markets.

Sustainability Concern

“Even as the economic data continues to improve, there was still evidence of some concern about the sustainability of the recovery as evidenced by the massive rally in the long end of the U.S. yield curve,” said Eric Lascelles, chief economist and rates strategist at TD Securities Inc. in Toronto, in a note to clients. “The bullish tone in the bond market may seem at odds with the bullish tone in the U.S. equity market, but it appears that investors are hedging their bets.”

The Federal Reserve’s Beige Book survey released Sept. 9 indicated that while the worst of the downturn may be past, the economy has yet to show broader growth. “Loan demand was described as weak, and many districts reported that credit standards remained tight,” the report on economic conditions in all of the central bank’s 12 districts said.

Retail sales increased 1.9 percent in August, according to a Bloomberg News survey, after unexpectedly dropping 0.1 percent in July. The Commerce Department report is released Sept. 15.

Inflation as measured by the consumer price index fell 1.7 percent in August from the year-earlier period, the Labor Department is forecast to report the next day.

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: September 12, 2009 00:01 EDT