By Keith Jenkins and Wes Goodman Feb. 24 (Bloomberg) -- Treasuries fell, paring the biggest rally since December, before an auction of $42 billion of five- year notes and a report that economists said will show U.S. new- home sales increased in January. The Treasury is scheduled to auction $32 billion of seven- year securities tomorrow, the last of four sales totaling an unprecedented $126 billion for a single week. Federal Reserve Chairman Ben S. Bernanke is scheduled to testify before the House Financial Services Committee today. The Fed increased the rate charged to banks for direct loans last week for the first time in more than three years. “Supply and Bernanke’s speech are the two main drivers for Treasuries today,” said David Schnautz, an interest-rate strategist at Commerzbank AG in Frankfurt. “The timing of the five-year auction is a little bit delicate.” The yield on the benchmark 10-year note rose 1 basis point to 3.70 percent as of 6:38 a.m. in New York, according to BGCantor Market Data. The 3.625 percent security due in February 2020 dropped 3/32, or 94 cents per $1,000 face amount, to 99 13/32. The yield slid 11 basis points yesterday, the most since Dec. 17. U.S. government bonds slipped even as stock markets around the world declined, with the MSCI World Index dropping 0.3 percent. Sales of new homes rose 3.2 percent last month, following a 7.6 percent decline in December, according to the median forecast of 71 economists in a Bloomberg survey before today’s Commerce Department report. Other government figures this month showed the U.S. unemployment rate fell and housing starts gained. Discount Rate U.S. policy makers raised the discount rate to 0.75 percent from 0.5 percent on Feb. 18. The previous time the Fed lifted the rate was in June 2006. The central bank said the decision was “intended as a further normalization of the Federal Reserve’s lending facilities” and did “not signal any change in the outlook for the economy or for monetary policy.” Bernanke “will repeat that the discount rate hike was not a signal of tighter monetary policy and that rates will stay on hold for some time,” said David Keeble, head of fixed income strategy at Credit Agricole Corporate and Investment Bank in London. Interest-rate futures on the Chicago Board of Trade yesterday showed a 56 percent chance U.S. policy makers would raise the target lending rate by at least a quarter-percentage point to 0.5 percent by November. That was down from 58.8 percent a day ago. The Fed cut its target for overnight loans to a range of zero to 0.25 percent in December 2008. Monthly Loss Treasuries have handed investors a 0.2 percent loss in February, according to indexes compiled by Bank of America Corp.’s Merrill Lynch unit. The MSCI World Index of shares returned about 0.7 percent. The five-year notes being auctioned today yielded 2.41 percent in pre-auction trading, up from 2.37 percent at the prior sale of the securities on Jan. 27. Investors bid for 2.80 times the amount on offer at last month’s sale, compared with an average of 2.48 for the past 10 auctions. Indirect bidders, the category of investors that includes foreign central banks last month, purchased 53 percent of the notes last month, versus the 10-sale average of 49 percent. Treasuries, Bunds Treasury 10-year note yields will fall relative to equivalent-maturity German bunds, according to Citigroup Inc., one of the 18 primary dealers required to bid at government auctions. Investors should sell the 3.25 percent German bund maturing in January 2020 at 3.16 percent and buy the benchmark Treasury 10-year note at 3.72 percent, Mark Schofield, head of interest- rate strategy at Citigroup in London, wrote in a research report today. The yield difference, or spread, may narrow to 38 basis points, Schofield wrote. The spread was at 55 basis points today, according to generic data compiled by Bloomberg. Treasuries rallied yesterday after a report showing a larger-than-forecast decline in consumer confidence bolstered demand as the government auctioned $44 billion of two-year notes. The securities drew a yield of 0.895 percent, compared with an average forecast of 0.912 percent in a Bloomberg survey of five of the central bank’s primary dealers. Two-year rates tend to track the Fed’s target for overnight lending because of their shorter maturity. Yields on longer-term bonds are more influenced by the size of the government’s debt and the outlook for inflation. To contact the reporters on this story: Keith Jenkins in London at Kjenkins3@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net.

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