Treasurys advanced after the government’s $29 billion auction of seven-year notes produced the strongest demand from a group of investors including foreign central banks since June 2009.

The yield on the current seven-year note dropped the most since the Sept. 21 Federal Reserve meeting as the last U.S. note sale of 2010 attracted buyers. Treasurys tumbled yesterday after the $35 billion five-year note auction attracted the lowest demand in six months.

“It was a decently strong above-average auction,” said Joseph Leary, an interest-rate strategist in New York at Citigroup Inc., one of the 18 primary dealers obligated to participate in U.S. debt sales. “Foreigners and investment funds showed up as they are trying to move out the curve to pick up yield.”

The yield on the current seven-year note fell 12 basis points, or 0.12 percentage point, to 2.75 percent at 1:44 p.m. in New York, according to BGCantor Market Data. The price of the 2.25 percent security maturing in November 2017 rose 3/4, or $7.50 per $1,000 face amount, to 96 7/8.

The seven-year note yield dropped as much as 14 basis points, the most since Sept. 21, when the Fed said it was willing to ease monetary policy further to boost the economy. The yield touched 2.92 percent on Dec. 16, the highest level since May 18.

Seven-Year Sale

At today’s offering of the December 2017 maturity, indirect bidders, including foreign central banks, purchased 64.2 percent of the notes, the highest level since June 2009. Direct bidders, non-primary dealer investors that place their bids directly with the Treasury, purchased 4.6 percent of the notes, compared with 8.5 percent last month and the 10-sale average of 10.4 percent.

The seven-year notes drew a yield of 2.830 percent, compared with the average forecast of 2.864 percent in a Bloomberg News survey of 6 of the 18 primary dealers. The bid- to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.86, compared with 2.63 at the Nov. 24 sale.

U.S. debt has returned 4.9 percent in 2010, more than erasing last year’s 3.7 percent loss, according to a Bank of America Merrill Lynch index. Investment-grade corporate debt has returned 8.2 percent this year, while the Standard & Poor’s 500 Index has increased 13 percent.

The 10-year note yield rose 15 basis points yesterday, the most in two weeks, following the five-year note sale. The bid- to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.61, the least since June. Primary dealers ended up buying 58.2 percent of the offering, the most since July 2009.

Two-Year Notes

Treasurys advanced on Dec. 27, when the $35 billion sale of two-year notes drew the highest level of demand in three months. The government auctioned a total of $99 billion in notes this week.

U.S. government debt maturing in more than a year has handed investors a loss of 2.7 percent in December, according to figures compiled by Bloomberg and the European Federation of Financial Analysts Societies. That’s the worst monthly performance among 26 sovereign indexes.

Bond bears speculate that U.S. economic growth will pick up in 2011, driven by the Fed’s second round of government debt purchases known as quantitative easing, an extension of tax cuts that President Barack Obama signed into law this month and a widening of deficits.

‘Small Bubble’

“QE2 created a small bubble in the economy and the markets,” said Kei Katayama, who helps oversee the equivalent of $55.2 billion as leader of the foreign fixed-income group at Daiwa Securities Group Inc. in Tokyo. “Stocks and commodities rose. That pushed yields up in the major markets.” Katayama said he holds fewer Treasurys than the percentages in the indexes he uses to gauge performance.

Gross domestic product will expand at a pace of 3 to 3.5 percent in 2011, Dean Maki, chief U.S. economist at Barclays Plc in New York, said yesterday in an interview with Pimm Fox on Bloomberg Television’s “Bottom Line” program. The rate of expansion was 2.6 percent in the third quarter.

“Growth in general will be fairly robust,” said Maki, whose firm is a primary dealer. “We are favorable on the U.S. stock market.”

First-time filings for jobless insurance decreased to 415,000 in the week ended Dec. 25, from 420,000 in the previous week, according to the median forecast of 26 economists in a Bloomberg News survey. The report from the Labor Department is due at 8:30 a.m. New York time tomorrow.