By Matthew Brown and Wes Goodman March 23 (Bloomberg) -- Two-year Treasuries rose, pushing yields down from near their highest in more than two months, on speculation demand will be strong at an auction of the securities today. Two-year note yields climbed 28 basis points between their 2010 low on Feb. 5 and yesterday, and are poised for their first monthly gain this year, as some investors bet the Federal Reserve will prepare to raise interest rates before the end of 2010. The Treasury plans to sell a record-matching $44 billion of the notes today, the first of three auctions this week totaling $118 billion. “There has been a decent concession of the market this month, so going into the auction it makes sense to be constructive at the short end of the U.S. curve,” said Patrick Jacq, a senior fixed-income strategist at BNP Paribas SA in London. The two-year note yield fell 2 basis points to 0.95 percent as of 9:52 a.m. in London, according to BGCantor Market Data. The 0.875 percent security due February 2012 rose 1/32 or 31 cents per $1,000 face amount, to 99 27/32. The yield climbed to 0.997 percent yesterday, the highest since Jan. 8. The 10-year note yield was little changed at 3.66 percent. ‘Extended Period’ While Fed officials last week repeated their pledge to keep the main interest rate near zero for an “extended period,” Thomas Hoenig, president of the Kansas City Fed, dissented from the decision, citing concern that the commitment to low rates could lead to a buildup of “financial imbalances” and increase risks to “longer-run” economic stability. “The cheapening of two-year Treasuries over the last month or two has come as some Fed governors have urged for an end to the ‘extended period’ language,” said David Keeble, head of fixed-income strategy at Credit Agricole CIB in London. “Today’s auction should go well, as central banks will be buying, but I wouldn’t buy it at this stage.” Keeble forecasts two-year Treasury yields to jump to 3.25 percent by the end of the year, with 10-year yields at 4.5 percent, narrowing the difference to 1.25 percentage points from 2.70 percentage points today. Futures on the CME Group Inc. exchange showed a 59 percent probability that policy makers will increase the target rate for overnight loans between banks by November, compared with a 62 percent probability a month ago. Pre-Auction Trading The two-year notes being sold today yielded 1.01 percent in pre-auction trading, climbing from 0.895 percent at the previous offer on Feb. 23. Investors bid for 3.33 times the amount on offer last month compared with an average of 3.10 for the past 10 auctions. Indirect bidders, the category of investors that includes foreign central banks, purchased 53.6 percent of the notes, versus the 10-sale average of 47.1 percent. The Treasury is also scheduled to sell $42 billion of five- year notes tomorrow and $32 billion of seven-year debt on March 25, also matching record amounts. Gains in Treasuries may be limited before a report from the National Association of Realtors that is forecast to show that sales of existing U.S. homes fell 1.1 percent in February to a 5 million annual rate, the lowest level in eight months. ‘Tentative’ Recovery “The recovery under way seems at this juncture to be tentative and fragile,” Fed Bank of Atlanta President Dennis Lockhart said yesterday in Naples, Florida. Headwinds to growth include a “weak banking sector,” muted consumer spending and “extremely cautious business investment,” he said. U.S. Treasuries returned 1.7 percent this year, compared with 2.7 percent for German government bonds and 1 percent for U.K. gilts, according to indexes compiled by Bank of America Corp.’s Merrill Lynch unit. To contact the reporters on this story: Matthew Brown in London at mbrown42@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net.

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