Yields on 10-year Treasury notes touched a two-week high as the government prepared to sell $21 billion of the securities today and global stocks rallied, damping demand for the safest assets. U.S. bonds erased earlier gains as U.S. stock-index futures rose, indicating the Standard & Poor’s 500 Index may extend the longest winning streak in three months. The U.S. auction today is the second of three note and bond sales this week totaling $69 billion. “Risk seems to be a back in vogue a little, and supply is coming, which is weighing on the market,” said Larry Milstein, managing director of government and agency debt trading in New York at R.W. Pressprich & Co. “Earnings reports will set the stage for the equity market, and Treasuries will trade off of equities given the lack of data.” The yield on the 10-year note rose as much as 2 basis points to 3.08 percent, the highest level since June 28, before trading at 3.07 percent at 8:44 a.m. in New York, data compiled by Bloomberg shows. The 3.5 percent security due in May 2020 fell 3/32, or 94 cents per $1,000 face amount, to 103 19/32. A basis point is 0.01 percentage point. Ten-year yields remained higher as Commerce Department data unexpectedly showed the U.S. trade deficit widened in May to the highest level since November 2008 as a gain in imports outpaced growth in exports. The gap expanded 4.8 percent to $42.3 billion. The benchmark note yields fell as low as 3.02 percent earlier today after Pacific Investment Management Co. and Federal Reserve Governor Elizabeth Duke said inflation is likely to remain low, while Portugal’s credit debt rating was cut two steps to A1 from Aa2 by Moody’s Investors Service. Pre-Auction Trading The 10-year U.S. securities scheduled for sale today yielded 3.086 percent in pre-auction trading, compared with 3.242 percent at the previous sale of the notes on June 9. Investors bid for 3.24 times the amount of debt on offer last month. The average at the prior 10 auctions including June is 3.03. Indirect bidders, the group that includes foreign central banks, bought 40.2 percent of the debt, versus the 10- sale average of 40.74 percent. Ten-year notes, among the most sensitive to inflation, are outperforming shorter-maturity debt as consumer prices fall. The securities have returned 8.6 percent this year, versus 5.5 percent for the broader market, Bank of America indexes show. The U.S. yesterday sold $35 billion of three-year notes at a record low yield of 1.055 percent. The Treasury will conclude this week’s sales with a $13 billion 30-year auction tomorrow. President Barack Obama has increased the U.S. marketable debt to a record $7.96 trillion as he tries to sustain the expansion. Yield ‘Too Low’ U.S. economic growth will cut demand for Treasuries later in 2010, said Kei Katayama, who helps oversee the equivalent of $51.3 billion in Tokyo as leader of the foreign fixed-income group in Tokyo at Daiwa SB Investments Ltd., part of Japan’s second-largest brokerage. “The current yield is a little bit too low,” Katayama said. “The economy is growing slowly, but there won’t be a double-dip recession.” He holds fewer Treasuries than the percentage in the index he uses to gauge performance, he said. The 10-year yield will climb to 3.36 percent by year-end, according to a Bloomberg survey of banks and securities companies’ projections, with the most recent forecasts given the heaviest weightings. The U.S. economy will expand 3.3 percent this year and 2.9 percent in 2011, following a 2.4 percent contraction in 2009, according to International Monetary Fund estimates made July 7. The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices, narrowed to 1.85 percentage points from this year’s high of 2.49 percentage points in January. Traders trimmed bets the Fed will raise its benchmark interest rate, which has been at a record low range of zero to 0.25 percent since 2008, by its December meeting, according to futures on the CME Group Inc. exchange. The chance fell to 15 percent, from 27 percent a month ago. To contact the reporters on this story: Cordell Eddings in New York at ceddings@bloomberg.net; Keith Jenkins in London at kjenkins3@bloomberg.net

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