Treasuries fell as demand waned for the relative security of U.S. debt, pushing yields up from a one-week low before data that economists said will show sales of new homes increased for a second month. Five-year bonds dropped for the first time in four days as the U.S. prepared to auction $35 billion of the securities today, the second of three note sales this week totaling $99 billion. The Federal Reserve, which is pumping $600 billion to spur the economy through asset purchases, is scheduled to finish a two-day policy meeting today. Faster growth and inflation will send Treasury yields higher, according to Jim Caron, global head of interest-rate strategy at Morgan Stanley & Co. “The situation for the U.S. economy has improved somewhat, so the underlying framework for Treasuries has become more challenging,” said David Schnautz, a fixed-income strategist at Commerzbank AG in London. “The risks for yields are tilted toward the upside.” The 10-year yield climbed three basis points to 3.37 percent at 10:22 a.m. in London, according to BGCantor Market Data. The 2.625 percent security maturing in November 2020 slid 8/32, or $2.50 per $1,000 face amount, to 93 27/32. The yield reached 3.31 percent yesterday, the lowest level since Jan. 18. Five-year yields rose four basis points to 1.98 percent. ‘Headed Higher’ “We still believe U.S. rates are headed higher,” Morgan Stanley’s Caron, who is based in New York, wrote in a report yesterday. The company is one of the 18 primary dealers that are obligated to bid at the government debt sales. Ten-year yields will advance to 3.75 percent by year-end, according to a Bloomberg survey of financial companies with the most recent forecasts given the heaviest weightings. The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices, was 2.23 percentage points, versus the five-year average of 2.09 percentage points. New home sales climbed 3.5 percent in December from the prior month to a 300,000 annual pace, according to the median estimate in a Bloomberg News survey before the Commerce Department report. The 274,000 rate in August was the lowest in data going back to 1963. U.S. economic growth quickened to a 3.5 percent pace in the fourth quarter of last year, from 2.6 percent in the previous three months, economists said before the government reports the figure on Jan. 28. Obama Speech Treasuries climbed yesterday, pushing 10-year rates down the most this year, before President Barack Obama proposed a freeze on some government expenditures. Obama, delivering his annual State of the Union address yesterday in Washington, called for a cap of some federal spending and an end to earmarked congressional projects inserted into legislation. He also proposed a freeze on non-defense discretionary spending that would save $400 billion from the budget over the next decade, and endorsed making additional cuts of $78 billion in the defense budget. The five-year notes being sold today yielded 2.01 percent in pre-auction trading, compared with 2.149 percent at the prior sale of the debt on Dec. 28. Investors bid for 2.61 times the amount on offer last month, less than the average of 2.75 for the past 10 auctions. Indirect bidders, which include foreign central banks, bought 35.6 percent of the notes at the previous sale. Direct bidders, non-primary dealers buying for their own accounts, purchased 6.2 percent, the least since November 2009. Debt Sales A government sale of $35 billion of two-year notes yesterday attracted more demand than the average of the last 10 auctions of the securities. The Treasury will conclude this week’s auctions with a $29 billion seven-year sale tomorrow. Treasuries outperformed their European counterparts this year as Europe’s sovereign-debt crisis prompted investors to buy U.S. securities as a safer alternative. The extra yield investors demand to hold two-year German notes instead of similar-maturity Treasuries widened to 69 basis points yesterday, the most since January 2009. The spread was little changed at 68 basis points today. Most investors predict at least one nation will leave the euro region within five years and that Greece and Ireland will default, according to a Bloomberg Global Poll. Treasuries are little changed in January, according to Bank of America Merrill Lynch indexes, compared with a 0.2 percent decline for the 17-nation euro area. The MSCI All Country World Index of stocks risen 2.2 percent this month, according to data compiled by Bloomberg. To contact the reporter on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net. To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

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