Feb. 22 (Bloomberg) -- Treasury 10-year note yields were at almost a six-week high as the U.S. prepared to sell a record $126 billion of notes and bonds this week.

The yield on 30-year bonds rose before today’s auction of $8 billion in comparable maturity inflation-linked securities and reports this week that economists say will show new-home sales and durable-goods orders gained last month. Federal Reserve Bank of San Francisco President Janet Yellen said the U.S. economy will operate below potential this year and next and needs low interest rates.

“The long end is under pressure because of the 30-year TIPS auction today,” said Ted Ake, head of government and agency trading in New York at Societe Generale. “The positive response to supply stems from expectations that the Fed would be on hold for a long time so the short end was received well. As we get closer to the Fed reversing direction, we will see less enthusiasm for buying, and supply will weigh on the market more.”

The 10-year note’s yield increased less than one basis point, or 0.01 percentage point, to 3.78 percent at 11:13 a.m. in New York, according to BGCantor Market Data. It rose to 3.82 percent on Feb. 19, the highest level since Jan. 11. The 3.625 percent security due February 2020 fell 1/32, or 31 cents per $1,000 face amount, to 98 23/32.

The 30-year bond yield rose one basis point to 4.72 percent, and the two-year note yield dropped three basis points to 0.88 percent.

Economy Needs Support

Yellen said in the text of a speech in San Diego that now is “not the time to be tightening monetary policy.”

“When the day comes to start raising rates again, we have tools at the ready,” Yellen said. “For the time being, the economy still needs the support of extraordinarily low rates.”

The “bias is for higher rates” in the Treasury market, strategists at Barclays Plc led by Ajay Rajadhyaksha in New York wrote in a note to clients. The firm is one of the 18 primary dealers required to bid in government debt auctions.

The spread between 2- and 10-year yields, known as the yield curve, widened four basis points to 2.89 percentage points, according to data compiled by Bloomberg. The gap increased to a record 2.94 percentage points on Feb. 18.

Ten-year rates will rise to 4.50 percent this year as the U.S. extends the maturity of its debt, Barclays said in its Feb. 19 report.

The figure will be 4.14 percent by Dec. 31, according to a Bloomberg survey of banks and securities companies, with the most recent forecasts given the heaviest weightings.

Treasury Sales

In addition to today’s auction of 30-year Treasury Inflation Protected Securities, or TIPS, the government is scheduled to sell $44 billion of two-year debt tomorrow, $42 billion in five-year securities the next day and $32 billion of seven-year notes on Feb. 25.

The previous record for a single week was $123 billion in October. The U.S. budget deficit will expand to an unprecedented $1.6 trillion in the fiscal year ending Sept. 30, the government predicted Feb. 1.

The weight of supply “will easily dwarf the Treasury redemption flow of $29 billion this week,” said Orlando Green, an interest-rate strategist at Credit Agricole SA in London. “In theory, this week’s supply batch could accentuate the recent pressure on bonds.”

The TIPS auction will be the first sale of 30-year TIPS since 2001. The U.S. introduced a 20-year inflation-indexed bond in 2004, which it ceased selling last year to make room on its auction calendar for 30-year TIPS.

Average Maturity

The government will seek to extend the average maturity of its sales to reduce its dependence on short-term debt, according to Karthik Ramanathan, head of the Treasury’s debt management.

TIPS have returned 0.1 percent this year, compared with 0.9 percent for conventional Treasuries, according to indexes compiled by Bank of America Corp.’s Merrill Lynch unit.

Investors became more bearish on U.S. government debt last week, according to a survey of money managers by Ried Thunberg ICAP Inc.

The company’s index measuring the outlook for Treasuries through the end of March fell to 44 for the seven days ended Feb. 19 from 45 in the prior period. A figure less than 50 shows investors expect prices to fall. The company, based in Jersey City, New Jersey, interviewed 26 fund managers controlling $1.4 trillion.

China reduced its holdings of Treasuries by a record amount in December while Japan increased its stake.

Purchases by Fukoku Mutual Life Insurance Co., Mizuho Asset Management Co. and Daiwa SB Investments Ltd. helped push Japan’s holdings to $768.8 billion, an increase of $11.5 billion. U.S. government debt held by China fell $34.2 billion to $755.4 billion, Treasury Department figures showed Feb. 16.

Homes, Durable Goods

Sales of new homes rose 3.8 percent in January following a 7.6 percent drop in the previous month, according to a Bloomberg News survey of 65 economists before the Commerce Department’s report on Feb. 24. Bookings for goods meant to last several years climbed 1.4 percent last month, a separate survey showed. The Commerce Department will issue the data Feb. 25.

To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net. Keith Jenkins in London at Kjenkins3@bloomberg.net;

Last Updated: February 22, 2010 11:15 EST