By Wes Goodman June 9 (Bloomberg) -- Treasuries maintained losses from yesterday as the U.S. government prepared to sell $21 billion of 10-year notes, the second of three auctions this week totaling $70 billion. Kansas City Federal Reserve Bank President Thomas Hoenig said the U.S. economy is in a sustained recovery, raising speculation Fed Chairman Ben S. Bernanke will reinforce the comment in congressional testimony today. Borrowing costs indicate the reluctance in bank lending caused by the European debt crisis is beginning to ease. “I see yields rising in the next few months,” said Yusuke Tanaka, a senior dealer in Singapore at Mitsubishi UFJ Financial Group Inc., part of Japan’s largest publicly traded bank. “The impact of the economic crisis will diminish. The flight to quality will get smaller and smaller.” The 10-year note yielded 3.19 percent as of 12:49 p.m. in Tokyo, according to data compiled by Bloomberg. The 3.5 percent security due May 2020 traded at 102 5/8. The yield increased four basis points yesterday, the most in almost a week. The 10-year rate will climb to 3.88 percent by year-end, according to a Bloomberg survey of banks and securities companies with the most recent forecasts given the heaviest weightings. Tanaka said he sold Treasury futures contracts in April and May. “We are in a modest recovery, but a sustained recovery,” Hoenig said yesterday in a speech in Kansas City, Missouri. “We need to begin to normalize monetary policy.” The central bank has kept its target for borrowing costs in a range of zero to 0.25 percent since December 2008. Bernanke said on June 7 that the central bank will raise interest rates before the economy returns to full employment. Willing to Lend An advance in the London interbank offered rate, or Libor, has stopped after the indicator surged over the past three months, signaling banks are becoming more willing to lend as the European debt crisis eases. Libor, which banks pay for three-month dollar loans, was 0.537 percent yesterday, unchanged from the end of last week. The rate has jumped from 0.252 percent at the end of February. Treasuries fell yesterday after the government sold $36 billion of three-year notes as demand eased for the relative safety of government securities. The Standard & Poor’s 500 Index increased 1.1 percent, its first gain in three days. Auction Results The 10-year securities scheduled for sale yielded 3.20 percent in pre-auction trading, dropping from 3.548 percent at the previous sale on May 12. Investors bid for 2.96 times the amount of debt on offer last month. The average at the prior 10 auctions including the May issue is 2.95 times. Indirect bidders, the group that includes foreign central banks, bought 41.9 percent of the debt on offer, versus the 10-sale average of 41.3 percent. Direct bidders bought 25 percent of the notes, the highest level since at least 2003. Ten-year notes, among the most sensitive to inflation, are outperforming shorter-maturity debt as consumer prices fall. The securities have returned 7.2 percent this year, versus 4.7 percent for the broader market, according to Bank of America Merrill Lynch indexes. The consumer price index dropped 0.1 percent in April, the first decrease since March 2009, figures from the Labor Department showed May 19. Excluding food and fuel, the so- called core rate was unchanged, capping the smallest 12-month gain in four decades. Three-Year Sale Yesterday’s three-year auction drew a yield of 1.22 percent, the lowest since January 2009. Bids submitted totaled 3.23 times the securities offered, compared with an average of 3.03 for the previous 10 sales. The three-year yield dropped a quarter percentage point in May on speculation efforts to contain Europe’s sovereign-debt crisis will slow the global economic recovery. The sale was “skewed by European concerns,” Dan Greenhaus, chief economic strategist at Miller Tabak & Co. in New York, said in a research note to clients. Yields may rise with favorable growth in the U.S. in the second quarter as investors’ attention “returns home,” he wrote. The Treasury is scheduled to auction $13 billion of 30- year bonds tomorrow. To contact the reporters on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.

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