Treasuries fell, extending their biggest loss in 29 months, before a report that economists said will show U.S. consumer confidence jumped in May to a six-month high, fueling bets the Federal Reserve will slow stimulus. Treasury 10-year yields approached the most since March before the U.S. auctions $35 billion of two-year notes in the first of three sales this week totaling $99 billion. Government securities have lost 1.3 percent in May, set for the steepest drop since December 2010, according to Bank of America Merrill Lynch indexes. Fed Chairman Ben S. Bernanke said last week that the central bank may cut the pace of asset purchases if officials see indications of sustained growth. “The theme that has dominated the market is of course Bernanke and combined with that it’s difficult for the market to assess the strength of the economy,� said Philip Marey, a senior market economist at Rabobank Groep in Utrecht, the Netherlands. “If we would have seen a strong picture that the economy is recovering, Treasury yields would already be much higher.� Benchmark 10-year yields climbed three basis points, or 0.03 percentage point, to 2.04 percent at 7:04 a.m. New York time, according to Bloomberg Bond Trader data. The 1.75 percent note due May 2023 slid 7/32, or $2.19 per $1,000 face amount, to 97 14/32. The rate reached 2.07 percent on May 23, the highest level since March 14. Ten-year yields will be 2.5 percent or higher by Dec. 31, Rabobank’s Marey said. Trade in U.S. government securities was closed yesterday for a public holiday. Stocks Gain The MSCI Asia Pacific Index rose 0.4 percent and the Stoxx Europe 600 Index of shares gained 1.2 percent, eroding demand for the relative safety of government bonds. U.S. stock-index futures also advanced. The Conference Board’s sentiment index climbed to 71 this month from 68.1 in April, according to the median prediction of 66 economists in a Bloomberg News survey. That would be the highest reading since November’s 71.50. The S&P/Case-Shiller index at 9 a.m. New York time today will show U.S. home values jumped 10.2 percent in March from 12 months earlier, the biggest gain in seven years, based on a separate Bloomberg survey of analysts. The Fed is buying $85 billion of Treasury and mortgage debt a month, a policy known as quantitative easing, to support the economy by putting downward pressure on borrowing costs. “If we see continued improvement and we have confidence that that is going to be sustained, then we could in -- in the next few meetings -- we could take a step down in our pace of purchases,� Bernanke told lawmakers last week. Fed Purchases Unemployment at 7.5 percent and a 1.1 percent inflation rate are helping keep yields and volatility in check. The two-year notes scheduled for sale today yielded 0.26 percent in pre-auction trading, up from a rate of 0.233 percent at a previous sale on April 23. The U.S. is due to auction $35 billion of five-year debt tomorrow and $29 billion of seven-year securities on May 30. “Coming into this week, sentiment in bond markets wasn’t good as we tested important levels already� in both Treasuries and German bunds, said Piet Lammens, head of research at KBC Bank NV in Brussels. “The decline in bond markets was already well under way when Bernanke spoke but certainly it helped.� Treasury declines may accelerate should the 10-year yield jump above a possible cluster of buy orders at 2.09 percent, with the risk that rates may climb toward 2.40 percent, Lammens said. Treasury Inflation-Protected Securities show investors anticipate an average increase of 2.26 percent in consumer prices for the next decade, up from 2.23 percent on May 23, which was the least since Aug. 9. Bank of America Merrill Lynch’s MOVE Index, which tracks option projections for the pace of swings in Treasuries maturing in two to 30 years, fell to a record 48.87 on May 9. The index rose to as high as 68.2 last week, below the average of 96.6 since 2006. To contact the reporter on this story: Lukanyo Mnyanda in Edinburgh at lmnyanda@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net

Source