By Keith Jenkins and Wes Goodman Feb. 23 (Bloomberg) -- The yield on 10-year Treasuries traded near the highest in almost six weeks before a bond auction and reports that are expected to show falling housing prices and consumer confidence. The U.S. is scheduled to sell $44 billion of two-year notes today, the second of four auctions this week totaling a record $126 billion. Figures last week showed consumer prices excluding food and energy declined in January, bolstering speculation the Federal Reserve will refrain from raising interest rates in coming months. Fed Chairman Ben S. Bernanke is scheduled to testify before congressional panels tomorrow and the next day. “The key point for today is the rather delicate timing of the two-year note auction before Bernanke’s testimony,” said David Schnautz, an interest-rate strategist at Commerzbank AG in Frankfurt. Investors may be cautious about buying such short- term debt after the Fed’s surprise increase to the discount rate last week, Schnautz said. The 10-year note yielded 3.80 percent as of 8:22 a.m. in London, according to data compiled by Bloomberg. The 3.625 percent security due February 2020 fell 1/32, or 31 cents per $1,000 face amount, to 98 18/32. The yield reached as high as 3.82 percent on Feb. 19. The two-year note yield was little changed at 0.89 percent. Consumer sentiment dropped in February for the first time since October, according to a Bloomberg survey of economists before the New York-based Conference Board reports the figure today. Home prices in the U.S. declined 3.1 percent in December from November, a 36th straight month of decline, a separate report may show. Inflation Outlook The difference between yields on 10-year notes and Treasury Inflation Protected Securities, or TIPS, a gauge of trader expectations for consumer prices, narrowed for a third day to 2.26 percentage points. The consumer price index rose 0.2 percent in January, and fell 0.1 percent when excluding food and energy, the Labor Department said on Feb. 19. The core inflation rate has increased 1.6 percent in the past 12 months, below the average of 2.7 percent since the start of the 1990s. “Core disinflation lives,” Ed McKelvey, senior U.S. economist for Goldman Sachs Group Inc. in New York, wrote in a report yesterday. “We continue to expect year-to-year core CPI inflation to recede during 2010.” Goldman is one of the 18 primary dealers that underwrite the U.S. debt. Bond investors track these figures because increases in the cost of living erode the value of the fixed payments from debt. Disinflation is a slowing of inflation. Below Potential Two-year notes rose for a second day yesterday as Fed Bank of San Francisco President Janet Yellen said the U.S. economy will operate below potential this year and next. Now is “not the time to be tightening monetary policy,” Yellen said in a speech in San Diego. The Fed will leave its target for overnight lending in a range of zero to 0.25 percent through June and raise it to 0.50 percent in the third quarter, according to a Bloomberg survey of banks and securities companies, with the most recent forecasts given the heaviest weightings. The government will auction $42 billion in five-year notes tomorrow and $32 billion of seven-year debt Feb. 25. It sold $8 billion in 30-year Treasury Inflation Protected Securities yesterday. Two-year notes yielded 0.94 percent in pre-auction trading, climbing from 0.88 percent at the prior sale of the securities on Jan. 26. Investors bid for 3.13 times the amount on offer at the previous auction, compared with an average of 3.03 for the past 10 sales. Indirect Bidders Indirect bidders, the category of investors that includes foreign central banks, purchased 43.1 percent of the notes, versus the 10-sale average of 44.6 percent. Two-year notes have returned 0.7 percent this year, versus a 0.8 percent loss for 30-year bonds, according to indexes compiled by Bank of America Corp.’s Merrill Lynch unit. The sale of 30-year TIPS drew a yield of 2.229 percent. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of bonds offered, was 2.45. The bidding result “does not scream an A-plus auction,” Dan Greenhaus, chief economic strategist at Miller Tabak & Co. in New York, wrote in a note to clients. “There has been a clear removal of inflationary concerns from the marketplace over the last few trading days and weeks.” The difference between two- and 10-year yields was 2.91 percentage points, close to the high of 2.94 percentage points set Feb. 18. Two-year yields, which follow what the Fed does with its target for overnight lending because of their short maturities, attracted investors betting the central bank will keep its benchmark rate at a record low to spur the economy. Money managers demanded a premium to buy longer-term securities as the Treasury Department holds this week’s record debt sales. To contact the reporters on this story: Keith Jenkins in London at Kjenkins3@bloomberg.net or Wes Goodman in Singapore at wgoodman@bloomberg.net.

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