June 9 (Bloomberg) -- Treasuries fell for a second day as the U.S. prepared to sell $21 billion of 10-year notes, the second of three auctions this week totaling $70 billion. The securities pared this month's advance after Kansas City Federal Reserve Bank President Thomas Hoenig said yesterday the U.S. economy is in a sustained recovery before Fed Chairman Ben S. Bernanke's congressional testimony today. China's inflation rate and export growth in May exceeded economists' forecasts, Reuters reported, reducing demand for relative safety. "It's the weight of supply," said David Ader, head of government bond strategy at Stamford, Connecticut-based CRT Capital Group LLC. "People are sitting on their hands. No one wants to buy the low yields in a given cycle. We have the 10- year note auction, yields are low, positions are flat." The 10-year note's yield rose three basis points, or 0.03 percentage point, to 3.22 percent at 8:45 a.m. in New York, according to BGCantor Market Data. The price of the 3.5 percent security maturing in May 2020 fell 9/32, or $2.81 per $1,000 face amount, to 102 3/8. A drop in Treasuries yesterday pushed the yield up four basis points, the most in almost a week. The yield will climb to 3.84 percent by year-end, according to a Bloomberg News survey of banks and securities companies, with the most recent forecasts given the heaviest weightings. Record-low inflation and prolonged unemployment mean the Fed will hold off raising interest rates until 2011, according to economists surveyed by Bloomberg News. Inflation Gauge The central bank's preferred price gauge will rise 1.1 percent this year, the smallest gain in data going back to 1960, and the jobless rate will average more than 9 percent through next year, the median estimate of 65 economists surveyed from June 2 to June 8 showed. Speaking yesterday in Kansas City, Missouri, Hoenig repeated his call to raise the target lending rate to 1 percent by the end of September. "We are in a modest recovery, but a sustained recovery," Hoenig said. "We need to begin to normalize monetary policy." The central bank has kept its target for borrowing costs in a range of zero to 0.25 percent since December 2008. Hoenig has voted against all three central bank statements this year, saying in April that the Fed's pledge to keep its main rate low for an "extended period" limits its "flexibility to begin raising rates modestly." The rate has been zero to 0.25 percent since December 2008. Bernanke on Rate Bernanke said at a Washington event on June 7 that the central bank will raise interest rates before the economy returns to full employment. He's due to testify before the House Budget Committee at 10 a.m. Washington time. China's consumer prices rose 3.1 percent from a year earlier, exports jumped about 50 percent and new loans totaled 630 billion yuan ($92.3 billion), Reuters reported, citing three unnamed people who said a government official stated the figures at a investors' conference. The central bank and statistics and customs bureaus declined to comment when Bloomberg News reached them. Interbank borrowing costs indicate stress in the financial system caused by the European debt crisis is failing to escalate. An advance in the London interbank offered rate, or Libor, has stalled after the indicator surged over the past three months, signaling banks are becoming more willing to lend as the European debt crisis eases. Dollar Libor Libor, which banks pay for three-month dollar loans, was 0.537 percent today, unchanged from the end of last week. The rate has jumped from 0.252 percent at the end of February. Treasuries fell yesterday as the government sold $36 billion of three-year notes and demand eased for the relative safety of government securities. The three-year auction drew a yield of 1.22 percent, the lowest since January 2009. Bids submitted totaled 3.23 times the securities offered, compared with an average of 3.03 for the previous 10 sales. The 10-year securities scheduled for sale today yielded 3.20 percent in pre-auction trading, dropping from 3.548 percent at the previous sale of the notes on May 12. The Treasury is scheduled to auction $13 billion of 30-year bonds tomorrow. --With assistance from Wes Goodman in Singapore. Editors: Dennis Fitzgerald, James Holloway

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