August 12, 2015 / 6:14 PM / 2 years ago

UPDATE 1-U.S. sells 10-year notes to poor demand

* Bid-to-cover ratio at latest 10-year auction lowest since 2009

* Share of direct bidders purchase smallest since August 2012

* Outlook on U.S. 30-year bond auction unclear (Adds details on auction, quote, byline)

By Richard Leong

NEW YORK, Aug 12 (Reuters) - The U.S. Treasury Department on Wednesday sold $24 billion in 10-year notes to weak demand, resulting in it paying a higher yield to investors than the market expected, Treasury data showed.

The poorly bid 10-year note sale, the second leg of this week's $64 billion quarterly refunding, occurred during a rally in U.S. Treasuries as investors piled into low-risk U.S. government debt in the wake of China's surprise devaluation of its currency in a bid to help its economy.

The drop in U.S. yields since Monday reduced the appeal of new Treasuries supply among investors who are seeking higher income, analysts said.

On the open market, 10-year yields fell as low as 2.045 percent prior to the auction, which was the lowest since April 30, according to Reuters data.

"There was little interest at these yield levels given the market rally," said John Canavan, market strategist at Stone & McCarthy Research Associates in Princeton, New Jersey.

The ratio of bids submitted to the amount offered at the latest 10-year auction was 2.40, the lowest since March 2009 when it was 2.14. This gauge of overall demand was 2.72 at the prior 10-year auction in July.

The yield on the latest 10-year note issue was 2.115 percent, the lowest at a 10-year auction since April and below the 2.225 percent seen in July. But it was about one basis point above what traders had expected in "when-issued" trading.

Fund managers, foreign central banks and other indirect bidders bought 60.14 percent of the supply, their biggest share since May.

Smaller dealers and other direct bidders purchased 5.82 percent, their smallest share since August 2012.

Primary dealers or the top 22 Wall Street firms that do business directly with the Federal Reserve bought 34.05 percent, which was their largest share since January.

It is unclear how the bidding will proceed for the $16 billion in 30-year bonds to be offered on Thursday, analysts said.

In "when-issued" trading, the upcoming 30-year issue was last quoted at 2.8110 to 2.8160 percent, according to Tradeweb. This compared with a yield of 3.084 percent set at the prior 30-year auction in July. (Reporting by Richard Leong; Editing by James Dalgleish)

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