July 9 (Bloomberg) -- Treasuries fell on speculation yesterday’s rally in 10-year notes, the biggest since March, was too large to sustain and the U.S. readied the last of this week’s four note and bond auctions.

Thirty-year bond yields rose from near the lowest in seven weeks before the $11 billion sale of the securities. Yesterday’s $19 billion auction of 10-year notes drew the most bids on record from investors seeking refuge from an economy whose recovery may take longer than expected.

“We obviously had a huge rally yesterday afternoon and the back end got a little overdone,” said Thomas Roth, head of U.S. government bond trading in New York at Dresdner Kleinwort.

The yield on the benchmark 10-year note gained eight basis points, or 0.08 percentage point, to 3.39 percent at 11:11 a.m. in New York, according to BGCantor Market Data. The 3.125 percent security maturing in May 2019 fell 22/32, or $6.88 per $1,000 face amount, to 97 28/32. The yield dropped yesterday on an intraday basis the most since March 18, when the Federal Reserve said it would start buying U.S. debt to cap borrowing costs.

The 30-year bond yield rose seven basis points to 4.26 percent. The yield was at 4.72 percent on June 11, the last time the government sold so-called long bonds. The security yields 4.30 percent in pre-auction trading.

Long Bond

The Standard & Poor’s 500 Index pared gains as billionaire investor Warren Buffett said the economy may require another stimulus package and crude oil plunged below $60 a barrel.

Today’s auction is the second reopening of the $14 billion 30-year bond sale on May 7. Investors bid for 2.68 times the amount of debt for sale at last month’s sale of the so-called long bond, versus an average of 2.28 percent for the past 10 auctions.

The 30-year yield yesterday fell as much as 15 basis points, the most in over five weeks after investors bid for a record 3.28 times the amount of 10-year notes offered at yesterday’s sale.

“Since many dealers were clearly left short and holding the bag in yesterday’s 10-year, and since dealers typically dominate 30-year reopenings, can dealers be relied upon to step up for today’s auction at market levels?” William O’Donnell, head of Treasury strategy at RBS Securities Inc. in Stamford, Connecticut, wrote in a note to clients. “We fear not after yesterday.” RBS is one of 17 primary dealers required to bid at Treasury auctions.

Demand has been rising at the U.S. auctions, especially from indirect bidders such as foreign central banks. That class of investors purchased 43.9 percent of the 10-year notes offered yesterday, compared to 34.2 percent at the June sale of the securities. Indirect bidders bought 54 percent of the three-year notes sold on July 7, up from 43.8 percent in June.

$1.1 Trillion

“If the last six auctions are any indication, demand should be pretty good,” said Martin Mitchell, head of government-bond trading at the Baltimore unit of Stifel Nicolaus & Co.

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

Longer maturities have led the Treasury market lower this year as President Barack Obama borrows record amounts to stimulate the economy and service deficits. 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 primary dealer Barclays Plc. The second-half sales would be more than the total amount of debt sold in all of 2008.

Thirty-year bonds handed investors a 21 percent loss so far in 2009, while two-year notes returned 0.6 percent, based on indexes compiled by Merrill Lynch & Co.

Artificially Suppressed

The Fed bought $2.999 billion of Treasuries maturing between July 2010 and April 2011, part of its $300 billion, six- month program to reduce lending rates. The central bank has bought $200.722 billion in U.S. debt through the operations, which began March 25. Today’s purchase is followed by four more over the next two weeks.

Falling Treasury yields have helped the central bank’s mission. The average 30-year mortgage rate dropped to 5.2 percent from 5.32 percent, mortgage buyer Freddie Mac of McLean, Virginia, said today in a statement. That’s the second consecutive weekly decline. The 15-year rate averaged 4.69 percent.

Yields on Treasuries are being artificially suppressed by the central bank; otherwise bonds would yield more than 10 percent, according to Lee Quaintance and Paul Brodsky of QB Asset Management in New York.

‘Remains Uncertain’

“There are powerful structural forces blocking any fundamental reconciliation of value,” Quaintance and Brodsky wrote. “These forces include bond markets comprised mostly of domestic and foreign investors with incentives that place them at odds with rational credit pricing, as well as central banks with unlimited spending capacity threatening, and being encouraged by all, to intervene when necessary to provide a ceiling on yields.”

Group of Eight leaders meeting in L’Aquila, Italy, said the recovery from the steepest recession since World War II was too fragile for them to consider reversing efforts to pump money into the economy.

The financial crisis, which started with the collapse of the U.S. property market in 2007, has triggered $1.47 trillion of writedowns and credit losses at banks and sent the global economy into its first recession since World War II.

“We note some signs of stabilization in our economies,” the G-8 draft said following the meeting yesterday. “However, the economic situation remains uncertain and significant risks remain to economic and financial stability.”

To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net; Matthew Brown in London at To contact the reporters on this story:

Last Updated: July 9, 2009 11:14 EDT