What debt bubble? Treasury easily sells new 10-year notes

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The Treasury had no trouble selling $16 billion in new 10-year notes today, belying worries that investors might choke on the burgeoning supply of government IOUs.

The notes sold at an annualized yield of 2.42%, below expectations. And investors put in $41.4 billion in bids for the securities, indicating substantial demand.

The reception for the notes ‘should in the near term provide some solace that 10-year Treasury paper in the U.S. still has a strong following,’ wrote George Goncalves, a bond strategist at Morgan Stanley, in a note to clients after the sale.

That should be a relief to President-elect Barack Obama, who is pushing Congress to approve a huge spending program to jump-start the economy. That would require even more massive borrowing ahead.

One of the biggest debates on Wall Street in recent weeks has been whether Treasury bond yields had fallen to ridiculously low levels, given the supply of debt coming to market this year. Investors pushed yields to record lows as they rushed for safety amid the financial-system meltdown.

‘Get out now!’ was the headline of Barron’s magazine’s cover story last weekend. The story said the Treasury market had become a ‘bubble’ and advised investors to jettison low-yielding government securities for riskier, higher-yielding bonds.

But some investors already had been doing that in recent weeks. The 10-year T-note yield bottomed at 2.05% on Dec. 30, and snapped back to 2.37% by the end of last week (still far below the mid-October yield of 4.08%).

Meanwhile, yields on corporate, mortgage and municipal bonds have been sliding since mid-December, as I noted here.

For now, there may be enough money looking for a home in bonds to keep pulling private-sector yields down while also keeping the Treasury’s borrowing costs from spiraling higher.

Goldman Sachs & Co. is telling clients to expect a gradual drift higher in Treasury yields this year. The firm expects the 10-year T-note yield to be between 3% and 3.25% by year’s end.

-- Tom Petruno