July 8 (Bloomberg) -- Treasuries surged as investors seeking refuge from an economy whose recovery may take longer than expected submitted the most bids on record at today’s $19 billion auction of 10-year notes.

Yields on 10-year securities fell the most since March 18, when the Federal Reserve said it would buy U.S. debt in an effort to cap borrowing costs. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 3.28. The note sale is the third of four this week totaling $73 billion. Traders speculated that company earnings reports scheduled to start today will show profits fell in the second quarter.

“The recession is still here, so the demand was strong,” said Andrew Richman, who oversees $10 billion in fixed-income assets as a strategist in West Palm Beach, Florida, for SunTrust Bank’s personal-asset management division.

The yield on the benchmark 10-year note fell 16 basis points, or 0.16 percentage point, to 3.30 percent at 4:41 p.m. in New York, according to BGCantor Market Data. The yield dropped as much as 18 basis points, the most since March 18, when it fell as much as 54 basis points. The 3.125 percent security due in May 2019 rose 1 9/32, or $12.81 per $1,000 face amount, to 98 1/2. It touched 3.278 percent, the lowest since May 21.

The 30-year bond yield fell as much as 15 basis points, the most in over five weeks, before tomorrow’s auction of $11 billion of the securities.

The 10-year notes sold today drew a yield of 3.365 percent, below the 3.398 percent average estimate of six bond-trading firms surveyed by Bloomberg News. Investors bid for 2.62 times the amount of debt available at the June sale, versus an average of 2.40 at the previous 10 scheduled auctions.

Economy ‘Hiccup’

Indirect bidders, a class of investors that includes foreign central banks, purchased 43.9 percent of the notes. At the June sale, they bought 34.2 percent, higher than the average for the past 10 sales of 27.9 percent.

“There’s a real flight to quality going on here,” said Andrew Brenner, co-head of structured products and emerging markets in New York at MF Global Inc., a broker of exchange- traded futures. “Everything points to a hiccup in the economy. There is tremendous demand for U.S. Treasuries.”

The offering is the second reopening of the record $22 billion 10-year note sale on May 6, and the securities mature in May 2019. The June sale totaling $19 billion drew a yield of 3.99 percent, which was the highest since August 2008.

Most U.S. stocks fell, with the Standard & Poor’s 500 index losing 0.2 percent.

Curve ‘Belly’

“We are seeing money coming out of equities mainly into the belly of the curve,” said Paul Horrmann, a strategist in Jersey City, New Jersey, at ICAP Plc, the world’s largest inter-dealer broker. “We are caching a bid here when equities get lower on a small flight to quality trade.”

Demand has been rising at the U.S. auctions, especially from indirect bidders such as foreign central banks. That investor class bought 54 percent of the three-year notes sold yesterday, up from 43.8 percent in June.

The levels of indirect bidders at recent sales of U.S. debt may have been affected by a rule change last month that eliminated a provision allowing some customer awards to be classified as dealer bids.

After more than doubling note and bond offerings to $963 billion in the first half, President Barack Obama may sell another $1.1 trillion 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.

Mortgage Rates

Yields on 10-year notes touched 4 percent on June 11 on concern the government’s borrowing would deluge demand as the economy showed evidence of emerging from its deepest recession in 50 years.

Since then, yields have fallen over 70 basis points as reports suggest the recession has further to run. The Labor Department said last week that the unemployment rate rose to 9.5 percent, the highest since 1983.

Analysts estimate profits for companies in the Standard & Poor’s 500 index fell an average 34 percent in the second quarter and will decrease 21 percent from July through September, according to Bloomberg data.

Alcoa Inc., the first company in the Dow Jones Industrial Average to post results, reported a second-quarter loss that narrower than analysts’ estimates. Production cuts and workforce reductions helped the largest U.S. aluminum producer save money.

Fed Purchases

The Fed announced on March 18 it would buy as much as $300 billion in Treasuries over six months to hold down borrowing costs. Falling Treasury yields have helped the central bank’s mission. The average rate on a typical 30-year fixed mortgage fell to 5.32 percent yesterday, from a 2009 high of 5.74 percent on June 10, according to North Palm Beach, Florida-based Bankrate.com.

Mortgage applications in the U.S. rose last week as refinancing jumped by the most since March and purchases climbed to the highest level in three months.

The Mortgage Bankers Association’s index of applications to purchase a home or refinance a loan increased 11 percent to 493.1 in the week ended July 3, from 444.8 in the prior week. The group’s refinancing gauge surged 15 percent, while the index of purchases gained 6.7 percent.

The Fed is scheduled to buy Treasuries due from July 2010 to April 2011 tomorrow, followed by four more purchases over the following two weeks, according to the central bank’s Web site.

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 8, 2009 16:45 EDT