By Matthew Brown and Wes Goodman March 25 (Bloomberg) -- Treasuries rose, rebounding from their biggest decline in nine months, as some investors bet yesterday’s surge in yields was unjustified. The gain pushed yields on 10-year notes down from within 6 basis points of the highest this year after they soared 17 basis points yesterday, the biggest increase since June 4, after a $42 billion debt auction. Fed Chairman Ben S. Bernanke is scheduled to speak today on unwinding the emergency programs implemented to rescue the economy from last year’s recession. Fed Vice Chairman Donald Kohn yesterday said he expects the Fed will tighten credit early enough to prevent an inflationary surge. “Treasuries got oversold yesterday, and that’s seeing them come back a little today,” said Marc Ostwald, a fixed-income strategist at Monument Securities Ltd. in London. “The market is going to be focused on Bernanke today and the exit strategy.” The yield on the benchmark 10-year note fell 3 basis points to 3.83 percent as of 6:26 a.m. in New York, according to BGCantor Market Data. The 3.625 percent security due February 2020 rose 7/32, or $2.19 per $1,000 face amount, to 98 11/32. The two-year yield fell 2 basis points to 1.08 percent. The relative strength index on the 10-year Treasury note rose to 66.3 yesterday, the most since January. A reading near 70 or above indicates yields are poised to fall. Treasuries ‘Slaughtered’ “Treasuries got slaughtered” yesterday, said Andy Cossor, Hong Kong-based chief market strategist for Asia at DZ Bank AG, Germany’s fifth-largest lender. Ten-year yields will climb to 4.60 percent by year-end, he said. The difference between two- and 10-year rates narrowed 1 basis point to 2.75 percentage points today after widening 5 basis points yesterday. The so-called yield spread touched 2.65 percentage points early yesterday, the least this year. Yesterday’s auction of five-year notes drew a yield of 2.605 percent, compared with the average forecast of 2.556 percent in a survey of eight of the Fed’s primary dealers. The difference of 4.9 basis points was the largest since July, based on Bloomberg surveys. Investors bid for 2.55 times the amount on offer, the lowest level since September. Demand from the group of investors that includes foreign central banks was the least in eight months, raising speculation China cut its purchases amid criticism from U.S. politicians. China’s Demand The decline in so-called indirect bids came as U.S. lawmakers resumed efforts to force China to allow the value of its currency, the yuan, to appreciate. Senator Charles Schumer, a New York Democrat, said on March 23 that he will seek to pass legislation before the end of May that would push China to raise the yuan’s value. “I would not be surprised if the low indirect bid had something to do with the Chinese sitting on their hands,” said Joseph Brusuelas, a strategist at Brusuelas Analytics in Stamford, Connecticut. China is America’s largest creditor, holding $889 billion of the nation’s $7.4 trillion of marketable debt, according to Treasury Department figures. The seven-year notes being sold today yielded 3.31 percent in pre-auction trading, rising from 3.078 percent at the previous sale of the securities on Feb. 25. Investors bid for 2.98 times the amount on offer last month, compared with an average of 2.72 for the past 10 auctions. Indirect bidders purchased 40.3 percent of the securities, versus the 10-sale average of 54.4 percent. Direct bidders, non-primary dealers buying for their own accounts, purchased 17.2 percent of the securities. It was the most since the U.S. revived sales of the notes in February 2009. Swap Spreads U.S. interest-rate swap spreads plunged to the lowest levels in more than two decades after Fitch Ratings’ downgrade of Portugal yesterday raised the risk of owning sovereign debt. “The momentum is to higher yields,” said Aaron Kohli, an interest-rate strategist in Stamford at Royal Bank of Scotland Group Plc, one of 18 primary dealers obligated to bid at Treasury auctions. “It’s not the auction that started the trend, it was the swap spreads. But the auction kept it going.” The gap between the rate to exchange floating- for fixed- interest payments and comparable-maturity Treasury yields for 10 years shrank to negative 10 basis points yesterday, the narrowest since at least 1988, when Bloomberg began collecting the data. The spread was 9.1 basis points today. 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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