Aug. 4 (Bloomberg) -- Treasuries declined as some traders speculated last week's rally was overdone given the U.S. government's plan to increase sales of long-term securities and investors became more bearish on the debt.

The decline pushed the yield on the 10-year note up from near the lowest level since July 17 before the U.S. sells $17 billion of the securities on Aug. 6, the largest amount since 2003. It will also auction $10 billion of 30-year bonds the next day, the most in two years. An index of sentiment showed investors were bearish on Treasuries for a fourth week.

``There's a lot supply coming this week and the market may well find it difficult to digest it all,'' said Christoph Rieger, a fixed-income strategist at Dresdner Kleinwort in Frankfurt. ``The market is looking increasingly vulnerable at these levels.''

The yield on the benchmark 10-year note rose 1 basis point, or 0.01 percentage point, to 3.95 percent as of 7:45 a.m. in New York, according to BGCantor Market Data. The 3.875 percent security due May 2018 fell 3/32, or 94 cents per $1,000 face amount, to 99 13/32.

The 10-year yield will climb to 4.5 percent in three months, before falling back to 4 percent by year-end, Rieger said.

The yield on the two-year note was little changed at 2.48 percent. Yields move inversely to bond prices.

Ried, Thunberg & Co.'s sentiment index for the end of December fell to 45 for the seven days ended Aug. 1 from 47 the week before, its weekly survey showed. A reading below 50 means that investors anticipate lower prices. The 31 fund managers surveyed by the Jersey City, New Jersey, research company manage a combined $1.33 trillion.

Treasury Auctions

This week's auction total is higher than analysts forecast and exceeds the $21 billion in notes and bonds sold in May. The government said July 30 it's considering more frequent auctions of both securities.

``The quantity of supply is too much,'' said Jaemin Cheong, a Treasuries trader for Industrial Bank of Korea in Seoul, the nation's biggest lender to small and mid-sized companies. ``It's good for people who are selling the market.'' Cheong said he set positions that will benefit if Treasuries fall.

For the first time since 1960, when it created the network of primary dealers obligated to buy and sell Treasury bonds, the U.S. government has the fewest bond traders making markets in its debt and a bigger burden for American taxpayers financing record federal deficits.

The number declined to 19 last month when Bank of America Corp., based in Charlotte, North Carolina, acquired Countrywide Financial Corp.

`Sloppier Auctions'

Fewer firms bidding for U.S. bonds means ``you're going to have sloppier auctions,'' said Mark MacQueen, a money manager in Austin, Texas, at Sage Advisory Services, who traded Treasuries at dealer Merrill Lynch & Co. in the 1980s. ``The taxpayer and the government are paying more no matter what happens.''

The paucity of primary dealers coincides with the largest borrowing requirement in American history and the acknowledgment by the administration of President George W. Bush that the U.S. will finance a record budget deficit of $482 billion next year.

Job losses in the U.S. provide reason to be optimistic on Treasuries, said Hiroyuki Bando, chief manager for fixed income, equities and currencies in Tokyo at Mitsubishi UFJ Trust & Banking Corp., part of Japan's biggest bank.

Investors anticipate the Federal Reserve will hold its target rate for overnight lending between banks at 2 percent at a meeting tomorrow after employers fired workers for a seventh straight month in July. Odds on an unchanged rate rose to 93 percent, from 82 percent a month ago, futures contracts on the Chicago Board of Trade show.

Slowing Economy

The yield on the 10-year Treasury may fall to 3.78 percent if a key technical level of 3.92 percent is breached, said Michael Rottman, head of fixed-income research in Munich at UniCredit Markets & Investment Banking.

``This level is a big hurdle for the market to break through,'' Rottman said. ``It's got close but bounced up again several times.''

The Commerce Department will say today the Fed's preferred measure of inflation rose to 2.2 percent in June, the most this year, according to the median estimate of 11 economists in a Bloomberg News survey.

Consumer spending, part of the same report, increased 0.4 percent in June after a 0.8 percent gain in May, the median of 67 estimates in a separate Bloomberg survey showed. The Commerce Department releases the figures at 8:30 a.m. in Washington.

`Further Slowdown'

``The underlying real economy is showing increasing signs of a further slowdown,'' said Sean Maloney, a debt strategist in London at Nomura International Plc. ``With the sure knowledge that globally growth is weakening, the back drop remains relatively friendly'' for bonds.

Inflation expectations have declined in the past month, Treasuries indicated.

The difference between yields on 10-year Treasury Inflation Protected Securities, or TIPS, and conventional notes narrowed to 2.30 percentage points, from 2.60 percentage points on July 4. The figure reflects the inflation rate that traders expect for the next decade.

To contact the reporters on this story: Gavin Finch in London at gfinch@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net

Last Updated: August 4, 2008 07:49 EDT