By Paul Dobson and Wes Goodman May 26 (Bloomberg) -- Treasuries fell, pushing yields up from yesterday’s one-year low, as stocks advanced amid signs the economic recovery is still on track. Notes snapped a two-day gain as the U.S. prepared to sell $40 billion of five-year securities today, the second of three auctions this week totaling $113 billion. A government report today will show factory orders increased, according to economists. The country’s top bond rating will come under pressure unless the government cuts record budget deficits, Moody’s Investors Service Inc. said. “The key thing is the equities turnaround, which has stopped the flight-to-quality bid,” said Michael Leister, a fixed-income strategist at WestLB AG in Dusseldorf, Germany. “In the U.S. we have an auction today so there is some supply concession.” The yield on the benchmark 10-year note rose two basis points to 3.19 percent as of 8:41 a.m. in London, according to BGCantor Market Data. The 3.5 percent security due May 2020 fell 4/32, or $1.25 cents per $1,000 face amount, to 102 20/32. The yield dropped to 3.06 percent yesterday, the lowest level since April 29, 2009, as the European debt crisis increased demand for the safest securities. MSCI’s Asia Pacific Index of regional shares advanced 0.6 percent today, and the Stoxx Europe 600 Index jumped 1.8 percent. Bookings for durable goods increased 1.3 percent in April after a 1.2 percent decline in March, according to a Bloomberg News survey of economists. New home sales may have climbed to an annual rate of 425,000 last month, the most since September 2008, a separate Bloomberg survey showed. The Commerce Department issues both figures today. ‘Substantially Worsened’ U.S. finances have been “substantially worsened by the credit crisis, recession, and government spending to address these shocks,” Moody’s analysts lead by Steven A. Hess wrote in a report yesterday. “The ratios of general government debt to GDP and to revenue are deteriorating sharply, and after the crisis they are likely to be higher than the ratios of other Aaa-rated countries.” The U.S. retains its top rating for now because of a “high degree of economic and institutional strength,” the New York- based ratings company said in its statement. The outlook is stable, Moody’s said. U.S. government securities still headed for their biggest monthly gain since the height of the financial crisis in 2008 after the debt crisis that started in Greece spread through Europe, boosting demand for the relative safety of Treasuries. U.S. Growth “Yields will tend to decline,” said Tsutomu Komiya, who handles U.S. government debt in Tokyo at Daiwa Asset Management Co., which has $77 billion in assets. “The pace of U.S. economic growth will slow. It will take a long, long time” for Europe to solve its debt problems, he said. U.S. government debt has returned 2.28 percent this month, Bank of America Merrill Lynch indexes show. The MSCI World Index of shares dropped 12 percent, Bloomberg data show. The last time Treasuries rallied so much was in December 2008, when they returned 3.54 percent. The securities gained 5.38 percent in November 2008 after the collapse of Lehman Brothers Holdings Inc. two months prior boosted demand for the safest securities. The difference between two- and 10-year yields narrowed to reach 2.37 percentage points, the least since October. Two-year rates tend to track the Fed’s target for overnight lending because of their shorter maturity. Yields on longer-term bonds are more influenced by inflation and by the size of the government’s debt. Indirect Bidders U.S. 30-year average fixed-mortgage rates dropped to 4.85 percent yesterday, a level not seen in more than a year, according to Bankrate.com in North Palm Beach, Florida. The five-year notes being sold today yielded 2.04 percent in pre-auction trading, compared with 2.54 percent at the prior sale on April 28. Investors bid for 2.75 times the amount on offer last month, above the average of 2.57 for the past 10 auctions. Indirect bidders, the category of investors including foreign central banks, bought 48.9 percent of the notes, up from 39.7 percent at the March sale. Direct bidders, non-primary dealers that place their bids with the Treasury, bought 14.3 percent, the most since October 2008. The 18 companies registered with the Federal Reserve as primary dealers are required to bid at the auctions. An auction of $42 billion of two-year notes yesterday drew the lowest yield on record, 0.769 percent. The Treasury will conclude this week’s note sales with $31 billion of seven-year debt tomorrow. To contact the reporters on this story: Paul Dobson in London at pdobson2@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net.

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