By Susanne Walker and Cordell Eddings July 27 (Bloomberg) -- Treasuries fell, pushing the yield on the 10-year note to the highest in more than a month, as the U.S. prepared to sell a record $115 billion in notes this week and purchases of new homes climbed the most in eight years. Government debt declined after new home sales rose 11 percent in June to a 384,000 annual pace, higher than any forecast of economists surveyed by Bloomberg News. The U.S. will auction $6 billion in 20-year Treasury Inflation Protected Securities today, followed by sales of 2-, 5-, and 7-year notes on the next three days. “People are putting supply on the front burner, so that’s putting pressure on prices,” said James Combias, New York-based head of Treasury trading at Mizuho Securities USA Inc., one of 17 primary dealers required to bid at Treasury auctions. “It’s a lot to take down, especially given the strength of the equity markets.” The yield on the benchmark 10-year note rose 10 basis points, or 0.10 percentage point, to 3.76 percent at 9:44 a.m. in New York, according to BGCantor Market Data. That’s the highest level since June 22. The 3.125 percent security maturing in May 2019 fell 25/32, or $7.81 per $1,000 face amount, to 94 28/32. The MSCI World Index of shares rose for an 11th day, its longest winning streak since June 2003, advancing 0.6 percent. The Dow Jones Industrial Average, which on July 24 completed its steepest two-week rally since 2000, rose 0.1 ‘Lot of Momentum’ “Risk assets clearly have a lot of momentum at this point and with cash looking for a home, there seems to be little to prevent this trend simply continuing,” said Charles Diebel, head of European fixed-income strategy at Nomura International Plc in London. Today’s TIPS sale will be followed by a $42 billion two- year note auction tomorrow, a $39 billion five-year offering on July 29 and a $28 billion sale of notes maturing in seven years on July 30. The previous record was $104 billion in two-, five-, and seven-year debt sold the week of June 22. Ten-year yields fell 25 basis points that week, the most since the five days ended March 20, when the Fed said it would buy $300 billion of Treasuries to cap borrowing costs. “We are approaching month’s end,” said Chris Ahrens, the Stamford, Connecticut-based head of interest-rate strategy at primary dealer UBS Securities LLC. “With the equity markets’ strong run, there may be some rebalancing back into bonds and this week’s auctions provide the perfect venue for taking action.” $1.046 Trillion The Treasury last sold 20-year TIPS on January 26. The bid- to-cover ratio, which gauges demand by comparing the number of bids to the amount of securities sold, rose to 1.92 from 1.58 at the previous auction, indicating stronger demand, and was the highest since July 24, 2007. Indirect bidders, a group of investors that includes foreign central banks, made up 54 percent of the purchases. The average for the previous five sales was 54.2 percent. The U.S. has raised $1.046 trillion from debt sales this year, according to government data. The budget deficit is projected to reach $1.85 trillion in 2009, equivalent to 13 percent of the nation’s economy, according to the nonpartisan Congressional Budget Office. Federal Reserve Chairman Ben S. Bernanke reiterated his confidence in the U.S. economy, saying “within a few years” it may be “growing strong.” Bernanke spoke yesterday at a town- hall-style meeting in Kansas City, Missouri. Low Inflation The decline in bonds may be tempered after Bernanke said inflation will remain low over the “next couple of years,” increasing expectations the central bank will refrain from raising interest rates. raising interest rates. “We can expect the low-interest rate policy for another two years,” said Akira Takei, a Tokyo-based manager in the international bond investment department at Mizuho Asset Management Co., a unit of Japan’s second-largest bank. “Yields have room to decline. I remain bullish on Treasuries.” Treasuries are the cheapest relative to inflation since 1994 after consumer prices fell 1.4 percent in June from a year earlier. The real yield, or the difference between rates on government securities and the real cost of living in the economy, is 5.10 percent for 10-year notes, compared with an average of 2.74 percent over the past 20 years. The gap helps explain why investors are buying bonds after they lost 4.8 percent this year, the steepest decline on record, according to Merrill Lynch & Co. indexes that date back to 1978. Holders have lost 0.3 percent this month, the indexes showed. Yield Curve The expectation that borrowing costs will remain at record lows has caused the so-called yield curve to steepen. The difference between two-and 10-year yields is 267 basis points. It reached 270 basis points on July 20, the widest since June 5. The spread will narrow to 2.48 percentage points by the end of September, according to a Bloomberg survey with the most recent forecasts given the heaviest weighting. A yield curve plots the rates of bonds of the same quality and different maturities. It steepens when yields on shorter- maturity notes fall, those on longer-dated bonds rise, or both happen simultaneously. To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net; Gavin Finch in London at gfinch@bloomberg.net.

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