Published: Apr 07, 2010 4:44 PM EDT

NEW YORK (AP) — Interest rates moved sharply lower in the bond market after investors snapped up a new supply of 10-year Treasury notes.

The yield on the 10-year note fell to 3.91 percent from 3.96 percent late Tuesday after Wednesday afternoon's auction. The yield is a widely used benchmark for mortgages and other consumer loans.

The price of the note maturing in February 2020 rose 12/32 to 97 22/32.

The government saw strong demand for $21 billion in 10-year notes, bucking a recent trend. The bid-to-cover ratio, a measure of demand, was 3.72. That means that for every dollar in notes the Treasury sold, there was $3.72 worth of bids.

The bid-to-cover ratio was 3.45 and 2.67 at the last two auctions for 10-year notes.

Treasury yields had climbed steadily in recent weeks, in part because of weak demand at some auctions. The 10-year yield rose above 4 percent on Monday for the first time since June. It has not ended a day above 4 percent since October 2008, just before the credit crisis peaked and investors poured into Treasurys, pushing their yields sharply lower.

James Dailey, chief investment officer at Team Financial Asset Management, said that the recent rise in yields made Treasurys an attractive investment because the Federal Reserve has pledged to keep its key interest rates low for the near future. The difference between those rates makes Treasurys a good, safe option for earning interest income, he said.

The strong demand seen at Wednesday's auction allays recent fears that investors might get skittish about buying government bonds. There had been concern that the government's record debt issuance would saturate the market.

Mounting evidence that the economy is healing had also pushed yields and interest rates higher. A stronger economy will eventually lead to inflation, which would require the Fed to raise borrowing costs.

If rates rise too fast, it could slow down an economic recovery. Rates are already climbing quickly in the mortgage market. The Mortgage Bankers Association said the average rate on traditional 30-year, fixed-rate mortgages surged to 5.31 percent last week, its highest level since August. The rate was 5.04 percent a week earlier.

The housing sector was among the hardest hit in late 2007 and helped push the economy into recession. A recovery in the sector has been uneven and rising interest rates could drag it down further.

The Fed also stopped its program last week of buying securities backed by pools of mortgages. The program was part of its extraordinary measures to help stimulate the economy.

In other trading, the yield on the two-year note that matures in March 2012 fell to 1.10 percent from 1.15 percent. Its price rose 3/32 to 99 26/32.

The yield on 30-year bond that matures in February 2040 fell to 4.79 percent from 4.83 percent. The price rose 25/32 to 97 15/32.

The yield on the three-month T-bill that matures July 8 rose to 0.17 percent from 0.16 percent.