June 18 (Bloomberg) -- Treasuries were little changed before the government announces how much it will sell of two-, five- and seven-year notes next week as President Barack Obama raises record amounts to fund economic stimulus packages.

Ten-year yields earlier climbed from a two-week low on concern sales will overwhelm demand amid speculation the recession is easing. The Federal Reserve bought $7 billion of debt due between 2016 and 2019 yesterday, less than the $7.5 billion acquired at the last so-called coupon pass in that range. The Treasury will sell $101 billion of notes next week, according to Wrightson ICAP LLC, a unit of the world’s largest interdealer broker.

“Supply is a big issue and will likely remain so through the course of the year,” said Michiel de Bruin, who helps manage about $27 billion as head of European government debt at F&C Asset Management Plc’s Dutch unit in Amsterdam. “A cocktail of huge supply, an economic recovery and pickup in inflation is not something investors will like.”

The 10-year note yield was at 3.69 percent as of 11 a.m. in London, according to BGCantor Market Data. The 3.125 percent security maturing in May 2019 climbed 1/32, or 31 cents per $1,000 face amount, to 95 12/32. The yield fell to 3.58 percent yesterday, the lowest level since June 4.

Treasuries will probably lag behind their German counterparts this year, amid a quicker and “deeper” economic recovery, de Bruin said.

Treasury Losses

U.S. government debt has fallen 3.8 percent since March 31 compared with a 1.6 percent decline for German bonds, according to Merrill Lynch & Co. 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 10-year Treasury note yielded 19 basis points more than the equivalent bund today, up from 13 basis points two days ago.

The Treasury Department will probably auction $40 billion in two-year notes, $35 billion of five-year debt and $26 billion of seven-year securities, according to Wrightson, a Jersey City- based research company.

The U.S. may sell a record $3.25 trillion of debt this fiscal year ending Sept. 30, according to Goldman Sachs Group Inc., one of the 17 primary dealers that are required to bid at government debt auctions.

“The Treasury announces its month-end financing requirement tonight so they may have capped gains as the market will probably renew its focus on supply,” said Adam Carr, a senior economist at ICAP Australia Ltd. in Sydney.

Rising Indicators

An index of U.S. leading economic indicators probably rose in May for a second straight month, reinforcing speculation the recession may end this year. The Conference Board’s gauge of the economic outlook for the next three to six months climbed 1 percent, according to the median forecast in a Bloomberg News survey. That would match April’s gain and mark the first back- to-back increase since September-October 2006.

Still, a Labor Department report today will show that initial jobless claims rose to 604,000 in the week ended June 12, from 601,000 the prior week, according to a Bloomberg survey. The number of people collecting benefits surged to 6.84 million in the week to June 6, according to a separate survey before the release of the figures today.

‘Not Yet Concrete’

The economic recovery is “not yet concrete” and yields may remain at current levels until September, said Giuseppe Maraffino, a fixed-income strategist in Milan at UniCredit Markets & Investment Banking.

“There are still problems and the jobs market remains weak,” Maraffino said.

China may increase its holdings of U.S. Treasuries in the “near” term should the dollar remain stable, Dai Xianglong, chairman of China’s national pension fund, wrote in an article published in China Finance magazine.

The nation will need some time to diversify its foreign- exchange reserve holdings and the U.S. government should take “substantial” measures to honor its promise of ensuring the safety of foreign investments, Dai, who also was a former central bank governor, wrote in an article in the Chinese- language publication. China Finance is affiliated with the People’s Bank of China.

The cost of living in the U.S. increased 0.1 percent last month after no change in April, the Labor Department said yesterday. On an annual basis, prices fell 1.3 percent. That means 10-year notes yield 5 percent after accounting for costs in the economy. The so-called real yield last rose above 5 percent in 1994.

‘Simply Silly’

The less-than-anticipated increase in consumer prices may allow Fed policy makers to keep the benchmark lending rate between banks at a low level for longer. The Fed’s target rate is at a record low range of zero to 0.25 percent.

The central bank will raise its benchmark lending rate “no sooner than 2011,” and any speculation officials will raise interest rates this year is “simply silly,” Pacific Investment Management Co.’s Paul McCulley wrote in a commentary on the company’s Web site.

Futures trading on the Chicago Board of Trade indicate a 45 percent chance the central bank will raise interest rates by the end of the year, down from more than 60 percent a week ago. The Federal Open Market Committee meets on monetary policy June 24 and 25.

The difference between rates on 10-year notes and Treasury Inflation Protected Securities, or TIPS, fell to 1.76 percentage points today, from 2.02 percentage points a week ago. The figure, which reflects the outlook among traders for consumer prices, has averaged 2.23 percentage points for the past five years.

-- With assistance from Dakin Campbell in New York and Shobhana Chandra in Washington. Editors: David Clarke, Rodney Jefferson.

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

Last Updated: June 18, 2009 06:16 EDT