By Paul Dobson and Wes Goodman June 8 (Bloomberg) -- Treasuries snapped two days of gains before $70 billion of note and bond sales this week that will gauge investors’ demand for the securities. Yields on 10-year notes rose from near the lowest in more than a week after Federal Reserve Chairman Ben S. Bernanke told ABC News yesterday that the central bank will raise interest rates before the economy returns to full employment. The U.S. will sell $36 billion of three-year notes today. “The auction will give us guidance on whether these levels are sustainable or not,” said Michael Markovic, a senior fixed- income strategist at Credit Suisse Group AG in Zurich. “The yield level is very low, so the likelihood of a really successful auction is lower than usual. If the three-year auction is not successful, then it will weigh heavily on the other sales.” The benchmark 10-year note’s yield increased two basis points, or 0.02 percentage point, to 3.17 percent at 7:28 a.m. in New York, according to BGCantor Market Data. The price of the 3.5 percent security maturing in May 2020 decreased 6/32, or $1.88 per $1,000 face amount, to 102 25/32. The yield dropped on May 25 to 3.06 percent, the lowest level since April 2009, as Europe’s sovereign-debt crisis encouraged demand for the safest assets. While the Fed will raise interest rates from a record low before the economy returns to “full employment,” Bernanke said officials don’t know when the process will start. The banking system isn’t fully healthy and lenders are “cautious” in providing credit, he said. ‘Moderate Paced’ Given the depth of the recession, the recovery is “moderate paced,” according to Bernanke. In Europe, policy makers “are committed to avoiding default in Greece” and elsewhere, he said. “Bernanke’s comments may well be behind the observed -- albeit modest -- pullback of Treasury prices,” said Marius Daheim, a senior fixed-income strategist at Bayerische Landesbank in Munich. “Ten-year Treasury yields have scope for an upside correction.” This week’s sale of notes and bonds marks the biggest drop in the total sale amount for comparable securities since the credit crisis began. The three-year notes scheduled for sale today yielded 1.16 percent in pre-auction trading, more than the yield of 1.414 percent at the previous sale of the securities on May 11. The auction yield of 1.2 percent in January 2009 was the lowest since the Treasury began regular sales of the securities in 1981. U.S. Deficit While President Barack Obama is starting to scale back borrowing, the U.S. still needs to raise debt to finance an annual budget deficit the White House forecasts at $1.6 trillion in 2010. The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices, widened two basis points to 1.96 percentage points. It was as narrow as 1.83 percentage points on May 21, the lowest level since October. The flight to Treasuries in May spurred by Europe’s debt crisis drove rates so low that there is a “disconnect” between what’s happening in the economy and the markets, Adam Carr, an economist in Sydney at ICAP Australia Ltd., wrote to clients. Improvement in global manufacturing and trade show predictions for an economic slowdown will be incorrect, wrote Carr, a senior economist at the unit of the world’s largest inter-dealer broker. A gain in Taiwan exports is the latest sign that the global economy is growing, he said. ‘Hard Evidence’ “Don’t give me your forecasts,” Carr said in the report. “I want facts and hard evidence. When I look at those facts, when I look at this evidence, it all points to one thing -- a healthy global recovery.” Treasuries pared declines as stocks dropped in Europe after Fitch Ratings said the U.K. faces a “formidable” fiscal challenge and needs strong consolidation. German 10-year bunds advanced, pushing the yield to its lowest in at least 21 years, on concern some European countries are still struggling to narrow their budget deficits. The extra yield investors demand for 10-year Treasuries instead of bunds widened six basis points to 64 basis points. “At some point the market will figure out that the financial stress in the European Monetary Union will not leave the German banking system immune,” Harvinder Sian, senior bond strategist at Royal Bank of Scotland Group Plc in London, said in an e-mailed note. “I prefer 10-year U.S. Treasuries here.” The U.S. has supplanted China and Brazil as the most attractive market for investors as confidence in the global economic recovery wanes in the wake of the Greek debt crisis. Investors are putting their money on Obama’s stewardship of the U.S. economy even as his job-approval rating has declined, according to a global quarterly poll of investors and analysts who are Bloomberg subscribers. Almost 4 of 10 respondents picked the U.S. as the market presenting the best opportunities in the year ahead. That’s more than double the portion who said so last October. To contact the reporters on this story: Paul Dobson in London at pdobson2@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net

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