By Susanne Walker and Matthew Brown March 23 (Bloomberg) -- Treasury two-year note yields fell from almost the highest level since January as the government prepared to offer the securities in the first of three note auctions this week totaling $118 billion. Ten-year notes were little changed before a report forecast by economists to show sales of existing U.S. homes fell in February for a third month. The two-year debt to be sold in today’s record-tying $44 billion sale yielded 1.012 percent in pre-auction trading, climbing from 0.895 percent at the previous offer on Feb. 23. “Supply is going to be the focus,” said Martin Mitchell, head government bond trader at the Baltimore unit of Stifel Nicolaus & Co., a St. Louis-based brokerage firm. “The when- issued is opening at about 1 percent. It’s a nice psychological level that attracts demand, so we could see heightened demand in that part of the market.” The two-year note yield fell 1 basis point, or 0.01 percentage point, to 0.96 percent at 8:56 a.m. in New York, according to BGCantor Market Data. The 0.875 percent security due in February 2012 rose 1/32 or 31 cents per $1,000 face amount, to 99 27/32. The yield climbed to 0.9974 percent yesterday, the highest level since Jan. 8. The 10-year note yield was little changed at 3.67 percent. Two-year note yields are poised for their first monthly gain this year after climbing almost 30 basis points from their 2010 low of 0.72 percent on Feb. 5 through yesterday. Plosser on Rates Federal Reserve Bank of Philadelphia President Charles Plosser said in remarks prepared for a panel discussion in Prague that the central bank’s commitment to low rates for an “extended period” reiterated after the March 16 meeting will limit its policy flexibility. Officials should use “simple” rules in setting the benchmark interest rate that would help promote economic stability, according to Plosser. “They allow policy makers to be more systematic and less discretionary in their approach to policy,” and would be tied to deviations from an inflation target, he said. Plosser’s remarks go beyond his previous calls for use of a simple inflation target by advocating a monetary policy approach that also focuses on changes in the economy. Futures on the CME Group Inc. exchange showed a 57 percent probability that policy makers will increase the zero to 0.25 percent target rate for overnight loans between banks by November, compared with a 59 percent probability a month ago. Hoenig’s Dissent Thomas Hoenig, president of the Kansas City Fed, dissented last week for a second straight meeting, saying “that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period” was no longer warranted. “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. Chicago Fed President Charles Evans said today at a press briefing in Shanghai that the U.S. central bank is likely to maintain an “accommodative” interest-rate stance for at least six months to support the momentum of economic growth. ‘Carried Into 2011’ “I would expect it will hold for the next three or four meetings, that’s about six months,” Evans said. “I won’t be surprised if it carried into 2011.” At last month’s auction of two-year notes, investors bid for 3.33 times the amount on offer, 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, the highest level since June. 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. Sales of existing homes in the U.S. fell 1.1 percent to a 5 million annual rate, the lowest level in eight months, according to the median forecast of 74 economists in a Bloomberg News survey. The report from the National Association of Realtors is due at 10 a.m. Washington time. 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 Merrill Lynch. To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net; Matthew Brown in London at mbrown42@bloomberg.net

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