Treasuries Fall as U.S. Prepares $21 Billion Auction of 10-Year Securities

Treasury 10-year notes held near yesterday’s low as the U.S. government prepared to sell $21 billion of the debt today, the second of three auctions this week totaling $70 billion.

The securities pared this month’s advance after Kansas City Federal Reserve Bank President Thomas Hoenig said the U.S. economy is in a sustained recovery, raising speculation Fed Chairman Ben S. Bernanke will reinforce the comments in congressional testimony today. China’s stocks rose the most in more than two weeks on a report of a surge in the nation’s exports and higher-than-estimated new loans in May.

“The Treasury auctions are dominant in what is otherwise a light data calendar today,” said Sean Maloney, a fixed-income strategist at Nomura International Plc in London. “With yields this low, the market needs a bit of a set up going into the auctions. We’re still positive on Treasuries going forward in this environment.”

The benchmark 10-year note yield rose one basis point to 3.2 percent as of 6:51 a.m. in London, according to BGCantor Market Data. The 3.5 percent security due May 2020 fell 3/32, or 94 cents per $1,000 face amount, to 102 17/32. The yield increased four basis points yesterday, the most in almost a week.

The 10-year rate will climb to 3.88 percent by year-end, according to a Bloomberg survey of banks and securities companies with the most recent forecasts given the heaviest weightings.

“We are in a modest recovery, but a sustained recovery,” Hoenig said yesterday in a speech in Kansas City, Missouri. “We need to begin to normalize monetary policy.” The central bank has kept its target for borrowing costs in a range of zero to 0.25 percent since December 2008.

Raise Rates

Bernanke said on June 7 that the central bank will raise interest rates before the economy returns to full employment.

Ten-year notes earlier rose as much as 5/32, or $1.56 per $1,000 face amount, as declines in Asian stocks and the weaker euro boosted demand for the safety of government debt. The MSCI Asia Pacific Index of shares fell 0.5 percent, reversing a gain from yesterday, and the euro approached a four-year low, before recovering to trade 0.1 percent higher at $1.1981.

European stocks gained, with the Stoxx Europe 600 Index adding 0.8 percent.

Interbank borrowing costs indicate stress in the financial system caused by the European debt crisis is failing to escalate. An advance in the London interbank offered rate, or Libor, has stalled after the indicator surged over the past three months, signaling banks are becoming more willing to lend as the European debt crisis eases.

Libor, which banks pay for three-month dollar loans, was 0.537 percent today, unchanged from the end of last week. The rate has jumped from 0.252 percent at the end of February.

Treasuries fell yesterday after the government sold $36 billion of three-year notes as demand eased for the relative safety of government securities.

Auction Results

The 10-year securities scheduled for sale yielded 3.20 percent in pre-auction trading, dropping from 3.548 percent at the previous sale of the notes on May 12.

Investors bid for 2.96 times the amount of debt on offer last month. The average at the prior 10 auctions including the May issue is 2.95 times. Indirect bidders, the group that includes foreign central banks, bought 41.9 percent of the debt on offer. Direct bidders bought 25 percent of the notes, the highest level since at least 2003.

Ten-year notes, among the most sensitive to inflation, are outperforming shorter-maturity debt as consumer prices fall.

The securities have returned 7.2 percent this year, versus 4.7 percent for the broader market, according to Bank of America Merrill Lynch indexes.

Prices Drop

The consumer price index dropped 0.1 percent in April, the first decrease since March 2009, figures from the Labor Department showed May 19. Excluding food and fuel, the so-called core rate was unchanged, capping the smallest 12-month gain in four decades.

Yesterday’s three-year auction drew a yield of 1.22 percent, the lowest since January 2009.

Bids submitted totaled 3.23 times the securities offered, compared with an average of 3.03 for the previous 10 sales.

The three-year yield dropped a quarter percentage point in May on speculation efforts to contain Europe’s sovereign-debt crisis will slow the global economic recovery.

The sale was “skewed by European concerns,” Dan Greenhaus, chief economic strategist at Miller Tabak & Co. in New York, wrote in a note to clients. Yields may rise with favorable growth in the U.S. in the second quarter as investors’ attention “returns home,” he wrote.

The Treasury is scheduled to auction $13 billion of 30-year bonds tomorrow.

To contact the reporter on this story: Matthew Brown in London at mbrown42@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net.

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