By Susanne Walker Feb. 13 (Bloomberg) -- Treasuries fell, with 10-year notes dropping for the first week this year, as the government sold a record-tying $81 billion in notes and bonds and Europe’s pledge to aid Greece dulled the haven appeal of U.S. debt. Ten- and 30-year yields rose the most in seven weeks as sales of the securities drew lower-than-average demand. The European Union said it was prepared to take action to support Greece, while leaving open how it might respond to a fresh wave of speculative attacks against member nations that are also struggling to cut deficits. U.S. consumer prices rose in January, a report is forecast to show next week. “With all of the issues the EU had with the PIGS, one would think we would see a continued flight to quality,” said Thomas L. di Galoma, head of U.S. rates trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors. He used an abbreviation for Portugal, Ireland, Greece and Spain. The yield on the benchmark 10-year note climbed 13 basis points, or 0.13 percentage point, the most since the five days ended Dec. 25, to 3.69 percent on the week. It touched 3.76 percent on Feb. 11, the highest level since Jan. 14. The 30-year bond yield increased 13 basis points to 4.65 percent. It touched 4.71 percent on Feb. 11, also the highest since Jan. 14. Higher Yields The U.S. sold $40 billion of three-year notes, $25 billion of 10-year notes and $16 billion of 30-year bonds, drawing yields of 1.377 percent, 3.692 percent and 4.720 percent, respectively. All of the yields were higher than forecasts in Bloomberg News surveys of bond-trading firms. The 30-year bond offering’s bid-to-cover ratio, which gauges demand by comparing the amount bid with the amount offered, was 2.36, compared with an average of 2.48 at the previous 10 sales. The bid-to-cover ratio at the 10-year note auction was 2.67, versus an average of 2.76. Direct bidders, non-primary dealers that bid on their own accounts, bought 24.1 percent of the 30-year securities, the most in at least five years. A higher yield at the auction than in pre-market trading may have cost the Treasury as much as $61.6 million in interest over the life of the debt, according to Bloomberg data. “Bidders felt no compulsion to bid through the market to purchase supply,” Chris Ahrens, head of interest-rate strategy in Stamford, Connecticut, at UBS AG, wrote in a note to clients. The firm is one of 18 primary dealers required to bid at Treasury auctions. “Some of the reticence was due to volatility emanating from the European sovereign markets.” Finance Ministers EU leaders on Feb. 11 pledged action to support Greece’s efforts to regain control of its finances, while demanding the nation get its deficit under control. Investors awaited a meeting of euro-region finance ministers Feb. 15-16 that will determine how the accord will be implemented. “Questions continue to mount about the near-term fate of Greece and the other PIGS nations,” wrote Kevin Giddis, head of fixed-income sales, trading and research at brokerage firm Morgan Keegan Inc. in Memphis, Tennessee, in a note to clients yesterday. “The latest worries are the lack of specificity about the true nature of the ‘determined and coordinated action’ pledged.” Europe’s recovery almost stalled in the fourth quarter as waning spending and investment in Germany unexpectedly brought growth in the region’s largest economy to a halt. Gross domestic product in the 16-nation euro region rose 0.1 percent from the third quarter, when it gained 0.4 percent, the EU’s statistics office in Luxembourg said yesterday. ‘Good Cop’ “We suspect that the statement calling for Greece to get its house in order and become an ionic column of fiscal responsibility was the bad cop speaking,” David Ader, the head of government bond strategy at Stamford, Connecticut-based CRT Capital Group LLC, wrote in a note to clients. “The good cop may prove more supportive and therefore encourage narrower spreads to the generic detriment of U.S. yields.” Treasuries rose yesterday on concern China’s economy will slow and threaten the global recovery after the nation ordered banks to set aside more deposits as reserves. The cost to protect against a default by Dubai increased to the highest level since state-controlled holding company Dubai World said last year it wanted to delay debt repayments. Credit- default swaps linked to Dubai debt jumped yesterday to 638 basis points, the highest since Nov. 27, according to CMA Datavision. Interest on Reserves Policy makers may raise the discount rate charged on direct loans to commercial banks “before long” as economic stimulus measures are unwound, Federal Reserve Chairman Ben S. Bernanke said Feb. 10 in testimony prepared for the House Financial Services Committee. He repeated the Fed’s statement that low benchmark rates are warranted “for an extended period.” The Fed may also temporarily replace the federal funds rate as a policy guide with interest it pays on banks’ deposits should fed funds become a “less reliable indicator than usual,” Bernanke said. Consumer prices increased 0.3 percent in January after increasing 0.1 percent a month earlier, according to the median forecast in a Bloomberg News survey of 62 economists. The Labor Department reports the data on Feb. 19. To contact the reporter on this story: Susanne Walker in New York at swalker33@bloomberg.net

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