By Theresa Barraclough Dec. 29 (Bloomberg) -- Treasuries were little changed, with two-year yields at the highest since August, on concern demand at today’s sale of five-year notes will cool after yesterday’s two-year auction was the weakest in four months. The Treasury prepared to offer $42 billion of five-year notes today, following a $44 billion auction of two-year securities yesterday and before a $32 billion sale of seven- year debt tomorrow. Treasuries of all maturities have fallen 3.7 percent this year, according to Bank of America Merrill Lynch indexes. That would be the worst performance since at least 1978, when Merrill began collecting the data. “I’m pessimistic about the auctions,” said Yasutoshi Nagai, chief economist at Daiwa Securities SMBC Co. in Tokyo, part of Japan’s second-largest brokerage. “With this small participation at the end of the year, weaker auctions will continue and yields have entered an upward trend.” The benchmark 10-year note yielded 3.85 percent, near the highest level since Aug. 10, at 6:31 a.m. in London, according to BGCantor Market Data. The 3.375 percent debt due in November 2019 traded at 96 5/32. The two-year notes auctioned yesterday traded at 99 26/32, for a yield of 1.09 percent, the same as the high yield at the sale. The yield is at the highest since Aug. 24. The gap between two-year and 10-year yields narrowed to 2.76 percentage points today. Yield Curve That spread, known as the yield curve, widened to a record 2.88 percentage points on Dec. 22 amid concern President Barack Obama’s attempt to revive economic growth with record spending will keep the deficit at $1 trillion and damp demand at government debt auctions. Indirect bidders, an investor class that includes foreign central banks, purchased 34.8 percent of two-year notes at yesterday’s sale, the lowest amount since July, and below the 45 percent average for the past 10 auctions. The auction drew a yield of 1.089 percent, the highest level since August, compared with the forecast of 1.059 percent in a Bloomberg News survey. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.91, the lowest since August. Last month’s sale drew a record-low yield of 0.802 percent and a bid-to-cover ratio of 3.16. Lacking Bargain Hunters “We’re not structurally set up to absorb this much volume on a week like this,” said Jim Vogel, head of agency-debt research at FTN Financial in Memphis, Tennessee. “There aren’t enough bargain hunters around to tidy things up when they get sloppy.” The last sale of five-year notes in November drew a high yield of 2.175 percent, the lowest since May, and attracted bids for 2.81 times the amount on offer, the largest bid-to- cover ratio for the securities since September 2007, at the start of the financial crisis. The five-year security to be sold today yielded 2.65 percent in pre-auction trading. 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. Demand for debt may also wane before reports today that economists said will show declines in U.S. home prices eased in October and consumer confidence climbed this month. Housing Recovery Property values in 20 metropolitan areas fell 7.2 percent in October from a year earlier, the smallest 12-month drop since 2007, according to the median forecast of economists surveyed by Bloomberg before today’s report from S&P/Case- Shiller. The New York-based Conference Board’s consumer confidence index rose to 53 this month from 49.5 in November, according to a separate survey. The measure reached a record low 25.3 in February. The Fed proposed yesterday a program to sell term deposits to banks to help mop up some of the $1 trillion in excess reserves in the U.S. banking system. The proposal, subject to a 30-day comment period, “has no implications for monetary policy decisions in the near term,” the central bank said in a statement released in Washington. Holders of U.S. debt have made a return of 81 percent over the past decade, according to Bank of America Merrill Lynch indexes. To contact the reporter on this story: Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net

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