June 23 (Bloomberg) -- Two-year Treasuries declined for the first time in three days before the government sells $40 billion of the securities, adding to concern record supply this year will overwhelm demand as the economy recovers.

The losses pushed the yield up from near the lowest level in more than two weeks before a report economists say will show sales of existing homes rose for a second month in May and as Federal Reserve policy makers start a two-day policy meeting. Gains yesterday pushed the 10-year yield down by the most this month after the World Bank said the global recession will be deeper than previously forecast. The Treasury is scheduled to auction a record $104 billion of notes this week.

“The supply issue is going to be on the agenda for a long time and will continue to keep yields on an upward trend,” said Elwin de Groot, a market economist at Rabobank Group in Utrecht, the Netherlands. “The shorter-end of the curve is more volatile with the Fed meeting coming up. There’s uncertainty about how they’re going to convey their message on the economic outlook.”

The two-year yield increased three basis points to 1.16 percent as of 11:45 a.m. in London, according to BGCantor Market Data. The 0.875 percent security maturing in May 2011 fell 2/32, or 63 cents per $1,000 face amount, to 99 14/32. The yield reached 1.12 yesterday, the lowest level since June 5.

The yield on the 10-year note climbed one basis point to 3.68 percent. It may increase to as high as 4.4 percent over the next 12 months, de Groot said. Yields move inversely to bond prices.

Worst Quarter

Treasuries handed investors a loss of 3.8 percent since March 31. If they don’t rally before the end of June this will be the worst quarter since the first three months of 1980, when they lost 5.9 percent, according to Merrill Lynch & Co.’s U.S. Treasury Master index.

Sales of existing homes rose to an annual rate of 4.82 million in May, the second month of increases, according to a Bloomberg News survey of economists before the National Association of Realtors releases the data today. New home sales advanced to an annual pace of 360,000, the Commerce Department will say tomorrow, according to a separate Bloomberg survey.

In addition to today’s sale of two-year debt, it will offer $37 billion of five-year notes tomorrow and $27 billion of seven-year securities on June 25. This week’s total is $3 billion more than when the government last sold notes of similar maturities, and the most since the U.S. began sales of this combination of maturities in February.

The U.S. will sell $3.25 trillion of debt in the fiscal year ending Sept. 30, according to Goldman Sachs Group Inc., one of the 17 primary dealers required to bid at Treasury auctions.

To contact the reporters on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net; Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net.

Last Updated: June 23, 2009 06:50 EDT