Investors step up for Treasury debt, even as supply surges

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Despite the ballooning federal deficit staring Treasury bond investors in the face, the government today managed to sell a record $30 billion in three-year notes.

The notes sold at an annualized yield of just 1.2%

Investors put in a total of $66.3 billion in bids for the securities, which traders said was decent demand, if a bit weaker than expected.

‘For a $30-billion issue, I think the market did pretty well handling it,’ said Brian Edmonds, head of interest rates at bond dealer Cantor Fitzgerald in New York.

Demand is crucial because of the volume of debt the government expects to issue this year to fund the financial-system bailout and stimulus spending for the sinking economy.

The Congressional Budget Office today estimated that the federal deficit will more than double this year, to nearly $1.2 trillion. And that’s not counting President-elect Barack Obama‘s planned stimulus program.

The mountain of Treasury debt sales on the horizon has raised fears that investors could balk, figuring it’s smarter to wait to buy later at what could be higher yields.

In Europe today, the German government’s attempt to sell up to $8 billion of 10-year bonds failed to generate enough demand to complete the offering, Bloomberg News reported. Bond dealers didn’t seem to make too big a deal of the shortfall in bids, but Edmonds said it’s a reminder that investors’ appetite for government securities isn’t infinite.

‘Does this make the Treasury nervous? No doubt,’ he said.

A snap-back in Treasury yields since mid-December may have helped boost demand at today’s T-note sale. Some investors in recent weeks had been selling low-yielding government bonds and funneling money into corporate, municipal and mortgage bonds, as well as into stocks.

But that shift stalled today amid more dismal news on the economy: Monthly employment data from private firm Automatic Data Processing estimated that the U.S lost a stunning 693,000 jobs in December. That was far worse than economists’ consensus estimate of 500,000 jobs lost.

The government will report the official December figure Friday.

Renewed fears about an economic free-fall sent the Dow Jones industrial average down 245.50 points, or 2.7%, to 8,769.70, the biggest drop since Dec. 9.

But bad economic news has been the Treasury bond market’s ally, as many investors continue to shun risk and focus on safety of principal.

Today, though, even Treasury yields were up modestly. Another test of investor demand comes Thursday, when the government will sell $16 billion in 10-year notes.

-- Tom Petruno