June 19 (Bloomberg) -- Treasuries were little changed, erasing earlier gains, as the market prepares for a record $104 billion of auctions next week.

Bonds headed for a weekly loss on concern the government will continue to increase borrowing even after overseas demand for U.S. assets slowed in April. The yield differential between 2- and 10-year notes held near the widest in more than a week as reports signaled the world’s largest economy is recovering.

“The market is still concerned about the long-term supply of Treasuries, which will continue to put upward pressure on yields,” said Satoshi Okumoto, a general manager in Tokyo at Fukoku Mutual Life Insurance Co., which has the equivalent of $58 billion in assets.

The yield on the benchmark 10-year note rose one basis point, or 0.01 percentage point, to 3.83 percent as of 7:49 a.m. in London, according to BGCantor Market Data. The price of the 3.125 percent security maturing May 2019 fell 3/32, or 94 cents per $1,000 face amount, to 94 7/32.

Ten-year yields may rise to as high as 4 percent next week, Fukoku’s Okumoto said.

The Treasury will auction $40 billion in two-year notes on June 23, $37 billion of five-year debt the following day, and $27 billion of seven-year securities on June 25. The 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 government didn’t sell coupon securities this week.

Foreign Demand Cools

“Treasuries tend to be bearish in weeks filled with auctions, such as next week,” analysts led by Brian Verlaan, global head of fixed-income research in Singapore at Standard Chartered Plc, wrote in a research report today.

U.S. government debt has handed investors a loss of 4.6 percent since March, according to Merrill Lynch indexes. U.S. securities are set for the worst quarter since losing 5.9 percent in the first three months of 1980, the data show.

The U.S. may sell a record $3.25 trillion of debt this fiscal year ending Sept. 30, almost four times 2008’s $892 billion, according to primary dealer Goldman Sachs Group Inc.

Foreigners’ net purchases of long-term equities, notes and bonds totaled $11.2 billion, compared with $55.4 billion in March, the Treasury said on June 15 in Washington.

Treasury bulls say yields will fall as the lower inflation rate will allow the Federal Reserve will keep its target rate at a record low range of zero to 0.25 percent.

‘Attractive to Buy’

“Treasuries are very attractive to buy at these levels when you’ve had the lowest inflation levels in 50 years and the lowest capacity utilization,” said Guthrie Williamson, portfolio manager in Sydney at Principal Global Investors, which manages $228 billion in assets globally.

Consumer prices rose 0.1 percent last month after being unchanged in April. On an annual basis, prices fell 1.3 percent. That means 10-year notes yield 5.13 percent after accounting for costs in the economy. That’s the first time so-called yields have risen above 5 percent since 1994.

The difference between rates on 10-year notes and Treasury Inflation Protected Securities, or TIPS, which reflects the outlook among traders for consumer prices, fell to 1.95 percentage points today, from 2.01 percentage points two weeks ago. The figure has averaged 2.23 percentage points in the past five years.

TED Spread

Yields indicate central bank efforts to revive credit markets that froze last year are showing some signs of success.

The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, was 44 basis points, narrowing from last year’s highest level of 4.64 percentage points.

Traders reduced bets policy makers will raise borrowing costs by the end of the year, according to futures on the Chicago Board of Trade. Expectations fell to a 50 percent chance, from more than 60 percent odds a week ago. The Federal Open Market Committee meets on monetary policy June 24 and 25.

Fed officials are considering whether to use next week’s statement to suppress any speculation they’re prepared to raise interest rates as soon as this year.

The London interbank offered rate, or Libor, for three- month dollar loans was at a record low of 0.61 percent yesterday, from 4.82 percent on Oct. 10. Libor is 36 basis points more than the upper end of the Fed’s target range for overnight loans between banks, the least since March 2008.

The British Bankers’ Association may allow more institutions to take part in setting Libor. The London-based BBA a year ago began a review of the process for setting the benchmark rate for everything from mortgages to corporate borrowing costs, amid speculation that some banks may have understated funding costs to avoid being seen as having difficulty raising financing.

Signs of Recovery

The yield gap between 2- and 10-year notes expanded after reports yesterday showed manufacturing in the Philadelphia region contracted in June at the slowest pace in nine months and U.S. leading indicators rose more than forecast in May.

The spread held near 2.58 percentage points, which was reached yesterday and was the highest since June 10. The gap may narrow to 2.41 percentage points by the end of the month, according to a Bloomberg News survey of economists and analysts. The estimate puts a heavier weighting on more recent forecasts.

The Federal Reserve Bank of Philadelphia’s general economic index climbed to minus 2.2 from minus 22.6 in May, the bank said yesterday. Negative numbers signal contraction. The Conference Board’s index of U.S. leading economic indicators rose more than forecast in May for the second straight month.

“There’s evidence that the economy may be turning the corner,” said Carl Riccadonna, a senior economist at Deutsche Bank Securities Inc., in New York. Deutsche is one of 17 primary dealers that trade with the Federal Reserve. “That’s pushing yields up.”

To contact the reporter on this story: Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net; Susanne Walker in New York at swalker33@bloomberg.net.

Last Updated: June 19, 2009 03:16 EDT