By Anchalee Worrachate and Wes Goodman May 27 (Bloomberg) -- Treasuries fell, eroding the biggest monthly gain in more than a year, on concern yields near the lowest levels in 2010 will curb demand when the U.S. sells $31 billion of seven-year notes today. Ten-year notes slid for a second day as stocks and the euro rallied. Dan Fuss, whose Loomis Sayles Bond Fund beat 95 percent of competitors in the past year, said he sold all of his Treasury holdings because of prospects interest rates will rise as the U.S. borrows unprecedented amounts. China denied as “groundless” a report that it’s reviewing foreign-exchange holdings of euro assets. “Yields at these levels are not that attractive, not when you aren’t even sure if Treasuries are still a safe asset,” said John Anderson, head of credit in London at Gartmore Investment Management Ltd. “The budget deficit in the U.S. is not small.” The yield on the benchmark 10-year note rose eight basis points, or 0.08 percentage point, to 3.27 percent at 7:30 a.m. in New York, according to BGCantor Market Data. The price of the 3.5 percent security due in May 2020 fell 23/32, or $7.19 per $1,000 face amount, to 101 29/32. The yield dropped on May 25 to 3.06 percent, the lowest since April 29, 2009. It has fallen 37 basis points in May, the most since a decrease of 71 basis points in December 2008. Concern that countries such as Greece will default and threaten the existence of Europe’s single currency has helped drive demand for Treasuries. The 10-year yield slid from 4.01 on April 5 to 3.06 percent two days ago, a drop of almost 1 percentage point. Euro’s Drop The euro’s 14 percent decrease against the dollar this year may aid Europe overcome its debt crisis, according to Emeric Challier, a money manager at Avenir Finance Investment Managers in Paris. “The crisis is over,” he said “The advantage of the euro drop is it will continue to support the recovery.” The MSCI World Index of shares advanced 0.8 percent, heading for its first two-day gain in more than a month. Europe’s currency strengthened for the first time in four days, climbing 0.8 percent to $1.2277. The 10-year Treasury yield has climbed more than 20 basis points since reaching the more than 12-month low two days ago. “It appears fear has at least taken a breather,” Royal Bank of Canada said in a report yesterday by economists and analysts including Tom Porcelli and Jacob Oubina in New York. “We currently do not anticipate a meaningful slowing in the U.S. economy from events taking place in Europe.” The company is one of the 18 primary dealers that are required to bid at the government debt sales. Treasury Returns Treasuries have underperformed Europe’s top-graded bonds this month, returning 2 percent, compared with 2.5 percent for German debt and 2.7 percent from U.K. gilts, Bank of America Merrill Lynch indexes showed. Treasuries advanced 2.3 percent in March last year, the indexes show. Futures on the CME Group Inc. exchange show a 34 percent chance U.S. policy makers will raise the benchmark rate by at least a quarter-percentage point this year, up from 31 percent a day before. The Federal Reserve has held the target rate for overnight bank loans in a range of zero to 0.25 percent since December 2008. The U.S. seven-year notes being sold today yielded 2.77 percent in pre-auction trading, declining from 3.21 percent at the previous sale of the securities on April 29. Auction Demand Investors bid for 2.82 times the amount on offer last month, compared with an average of 2.76 for the past 10 auctions. Indirect bidders purchased 59.5 percent of the securities, versus the 10-sale average of 54.5 percent. Bidding declined at auctions of two- and five-year notes earlier this week. Loomis Sayles’ Fuss said he doesn’t own Treasuries in any of the investments he is directly involved with after selling the last of them this week. “The fundamentals are awful,” Fuss said in a telephone interview yesterday from Boston. “The incremental borrower of funds in the U.S. capital markets is rapidly becoming the U.S. Treasury. Do you really want to buy the debt of the biggest issuer?” Fuss’s Loomis Sayles Bond Fund returned 27 percent in the past 12 months, Bloomberg data show. The company oversees $145 billion. President Barack Obama has increased U.S. marketable debt to a record $7.9 trillion to fund spending programs, fueling speculation the supply of Treasuries will outstrip demand. To contact the reporters on this story: Anchalee Worrachate in London at Wes Goodman in Singapore at wgoodman@bloomberg.net.

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