By Candice Zachariahs June 23 (Bloomberg) -- Treasury 10-year yields were near the lowest level in almost two weeks on speculation the Federal Reserve will cite evidence of sluggish economic growth when policy makers release their statement today. The Federal Open Market Committee will keep interest rates at a record low at the end of its two-day meeting, according to a Bloomberg News survey of economists. Sales of new homes slumped in May by the most in 16 years, a separate Bloomberg survey showed before today’s Commerce Department report. Yields on two-year notes dropped to a four-week low yesterday as the government sold $40 billion of the debt at a record low yield. “The market will be looking for any signs that the FOMC is getting more bearish on their growth profile,” said Damien McColough, head of fixed-income research in Sydney at Westpac Banking Corp., Australia’s second-largest lender. “The FOMC will maintain its stance of rates low for an extended period.” The 10-year note yielded 3.16 percent as of 6:48 a.m. in London, according to BGCantor Market Data. The 3.5 percent security security maturing in May 2020 was unchanged at 102 27/32. The yield dropped to 3.15 percent yesterday, the lowest level since June 8. The two-year yield declined to 0.68 percent yesterday, the least since May 25, after the government sold the securities at a rate of 0.738 percent. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of debt on offer, was 3.45, the highest since October. Indirect bidders, an investor class that includes foreign central banks, purchased 41.4 percent of the notes, the most since February. ‘Great Auction’ “It was a great auction,” said Michael Franzese, managing director and head of Treasury trading at Wunderlich Securities Inc. in New York. “If the world goes to hell, your money is secure. If things turn around really fast, you don’t lose a lot.” The U.S. is scheduled to auction $38 billion of five-year securities today and $30 billion of seven-year debt tomorrow. The five-year notes being sold today yielded 2.01 percent in pre-auction trading, compared to 2.13 percent at the previous offering May 26. Investors bid for 2.71 times the amount on sale last month versus an average 2.7 for the past 10 auctions. Indirect bidders, the category of investors that includes foreign central banks, purchased 41 percent of the securities versus the 10-sale average of 48 percent. ‘Nasty Thorns’ New homes sales declined 19 percent in May to a 410,000 annual pace, according to economists surveyed by Bloomberg before today’s report. The projected drop would be the biggest since January 1994. Purchases of existing houses dropped 2.2 percent to a 5.66 million pace, the National Association of Realtors said yesterday, less than the 6 percent increase forecast by economists. “My ‘economic recovery rose’ is losing its petals and leaving me with some nasty thorns in return for my optimism,” Kevin Giddis, head of fixed-income sales, trading and research at brokerage firm Morgan Keegan Inc. in Memphis, Tennessee, wrote in a note to clients. The central bank will alter the language in its policy statement after this week’s meeting to reflect a “sluggish” economy, Richard Clarida, global strategic adviser at Pacific Investment Management Co., said in an interview with Deirdre Bolton on Bloomberg Television’s “InsideTrack.” “The economy softened since the last meeting, and inflation is very well behaved,” Clarida said. Inflation Outlook The difference in yield between five-year Treasuries and similar-maturity Treasury Inflation Protected Securities shows investors anticipate an annual inflation rate of 1.65 percent over the term of the securities, down from 2.01 percent on April 28, when policy makers ended their previous policy meeting. The central bank will hold its target rate for overnight lending between banks at a record low zero to 0.25 percent, according to all 97 economists surveyed by Bloomberg. Policy makers have kept the benchmark at that level since December 2008. The Fed will keep its benchmark at a record low until the middle of 2011 as Europe’s sovereign debt crisis slows growth and damps inflation, according to Aberdeen Asset Management Plc. “The market clearly is on something of a knife-edge between inflation and deflation,” Paul Griffiths, who helps oversee $259.3 billion as London-based global head of fixed income at Scotland’s largest fund manager, said in an interview in Sydney. Inflation is “not a primary concern at the moment.” To contact the reporter on this story: Candice Zachariahs in Sydney at czachariahs2@bloomberg.net.

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