By Theresa Barraclough Dec. 23 (Bloomberg) -- U.S. 10-year government bond yields traded near the highest level in four months before the Treasury announces today the size of the auctions of two-, five- and seven-year notes next week. U.S. debt yesterday completed the steepest back-to-back decline since July after sales of existing U.S. homes increased more than forecast, adding to concern a quickening recovery will fuel inflation and deter investors from buying government debt. Demand for Treasuries has also waned after China central banker Zhu Min said Dec. 17 the U.S. can’t expect other nations to increase purchases of Treasuries to fund its fiscal shortfall. “We will go into the end of the year with a softer sentiment,” said Matt Seigel, a first vice president at MF Global Singapore Ltd., part of the world’s largest broker of exchange-traded futures and options contracts. Next week’s auctions “may be disappointing given the warning shots from China central bankers over the past few days.” The yield on the benchmark 10-year note climbed to 3.76 percent yesterday, near the highest since Aug. 13, according to BGCantor Market Data. The 3.375 percent security due November 2019 traded at 96 27/32. The yield increased 22 basis points so far this week, the biggest two-day drop since July 15. Trading of Treasury bills, notes and bonds was closed in Japan today for a holiday. Record Sales The U.S. will sell $44 billion in two-year notes on Dec. 28, $42 billion in five-year debt on Dec. 29 and $32 billion in seven-year securities on Dec. 30, according to estimates by Wrightson ICAP LLC, an economic advisory firm in Jersey City, New Jersey. A $44 billion two-year auction would match November and October’s record offerings. A $42 billion five-year sale and a $32 billion seven-year offering would equal records set last month. “When the U.S. has to fund its deficit through the combination of issuing more Treasuries and printing more dollars, it is inevitable that the dollar will continue to weaken,” Deputy Governer Zhu said on Dec. 17 at a forum in Beijing. Efforts by the U.S. to cut its current-account deficit mean other nations accumulate fewer dollars through trade, leaving them with less money to buy Treasuries, Zhu said. The difference in yields between 2- and 10-year notes widened to a record as investors bet the recovery will fuel inflation and reduce demand at record U.S. debt sales. The spread increased to as much as 288 basis points yesterday. Before this week, the previous record of 281 basis points was reached on June 5 when Treasuries plunged after a government report showed the smallest decline in U.S. payrolls in eight months. Ten-year note yields touched 4 percent the following week, the highest level in 2009. Home Sales Existing home sales increased 7.4 percent to a 6.54 million annual rate, the highest since February 2007, from a revised 6.09 million pace the prior month, the National Association of Realtors said yesterday in Washington. The difference between yields on Treasury Inflation Protected Securities due in 10 years and nominal notes, a measure of the outlook for consumer prices, climbed to as high as 2.38 percentage points yesterday, the most since July 2008. President Barack Obama is borrowing unprecedented amounts for spending programs. U.S. marketable debt increased to a record $7.17 trillion in November from $5.80 trillion at the end of last year. Treasuries of all maturities have fallen 3.2 percent this year, according to Bank of America Merrill Lynch indexes. Technical Indicators Thirty-year Treasury bonds are set to decline, pushing yields put to 4.8 percent, the highest in more than six months, according to a Citigroup Inc. report citing technical indicators. “U.S. 30-year yields have completed a morning star-like pattern on the daily chart suggesting higher yields ahead,” analysts led by Tom Fitzpatrick in New York wrote to clients in a report dated yesterday. A so-called morning-star trend is a pattern caused by three candle graphs, which traders use as an indication that the downtrend is about to reverse. Daily momentum indicators such as the moving average convergence/divergence, or MACD, also show that yields are likely to increase. The 30-year yield’s MACD was 0.0729, compared with 0.0553 for the so-called signal line, based on data compiled by Bloomberg. A rise of the MACD above the signal line suggests yields are in an upward trend. To contact the reporter on this story: Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net

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