By Wes Goodman May 4 (Bloomberg) -- The difference between U.S. two- and 10-year yields was near the least this year before an industry report that economists said will show home sales gained, eroding demand for the relative security of short-term Treasuries. Two-year notes are also lagging behind their longer-term counterparts as European officials arrange a rescue package to prevent Greece’s debt crisis from spreading, providing further reason for investors to trim holdings of the safest securities. Ten-year Treasuries are drawing more demand because their yields are higher. “Longer-term Treasuries offer a lot of pickup” in what investor can earn, said Peter Jolly, the Sydney-based head of market research for the investment-banking unit of National Australia Bank Ltd., the nation’s largest lender. “Inflation is very well behaved in the U.S.,” lending support to longer maturities. The spread between two- and 10-year rates, the so-called yield curve, was 2.69 percentage points as of 11:52 a.m. in Hong Kong, after shrinking to 2.67 percentage points earlier. It was 2.65 percentage points on March 24, the least since Dec. 10, according to data compiled by Bloomberg. Benchmark 10-year Treasury yields increased two basis points to 3.71 percent, climbing for a second day, Bloomberg data show. The price of the 3.625 percent security due in February 2020 fell 5/32, or $1.56 per $1,000 face amount, to 99 11/32. Trading volumes were smaller than usual because of a holiday in Japan. Banks Seeking Yield Ten-year yields have fallen about a quarter percentage point in the past month, versus a decline of 11 basis points for two-year rates. Two-year notes are seen as a safer bet because of their short maturity, while longer-term Treasuries are more influenced by inflation. Banks seeking yield increased demand at the Treasury’s auctions of 10- and 30-year securities in March. Thirty-year bonds offer 4.53 percent. Lenders purchased a record $2.562 billion, or 12 percent, of the 10-year notes sold on March 10, and $3.146 billion, or 24 percent, of the 30-year bonds offered the next day, government data show. Banks typically made up less than 1 percent of the demand for longer maturity debt. The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices, narrowed to 2.39 percentage points from this year’s high of 2.49 percentage points in January. The five- year average is 2.15 percentage points. The index of pending home resales climbed 5 percent in March following an 8.2 percent jump a month earlier, according to the median forecast in a Bloomberg News survey of economists before the National Association of Realtors reports the figure. Economy Quickening Ten-year yields will rise as the economy quickens, said Roger Bridges, who oversees the equivalent of $11.1 billion as head of bonds at Tyndall Investment Management Ltd. in Sydney. “Risk premiums on long-term rates are too low,” Bridges said. “The data seem to be verging on the stronger side.” He trimmed holdings at the end of last year, he said. The 10-year rate will advance to 4.13 percent by year-end, according to a Bloomberg survey of banks and securities companies, with the most recent forecasts given the heaviest weightings. The yen fell to an eight-month low against the dollar as signs the global economic recovery is gaining momentum damped demand for Japan’s currency as a refuge. The greenback climbed to 94.99 yen, the most since Aug. 24. Greece Rescue Treasuries fell yesterday after European officials announced the Greek rescue package and reports showed the U.S. economic recovery is broadening. Euro-region finance ministers agreed to a 110 billion-euro ($146 billion) rescue package for Greece after investors’ concern that governments will default on their debt sparked a rout in Portuguese and Spanish bonds last week and sent stock markets tumbling. Personal spending in the U.S. rose 0.6 percent in March after increasing a revised 0.5 percent in the prior month, the Commerce Department said. The Institute for Supply Management’s index of manufacturing rose to 60.4 last month, the highest level since June 2004, from 59.6 in March, according to the Tempe, Arizona- based group. To contact the reporters on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.

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