(c) 2013, Bloomberg News.

(c) 2013, Bloomberg News.

NEW YORK Treasury 10-year notes gained for the first time in five days as yields at almost a two-year high drew buyers betting the securities have already priced in an improving U.S. economy and an end to Federal Reserve bond purchases in 2014.

Treasuries advanced as investors bought U.S. bonds to match market indexes, and as a report showed sales of previously owned homes rose less than forecast in November. Gains were tempered before data on Tuesday forecast to show consumer confidence rose in December and a report next week that may show further employment gains. U.S. government securities headed for the first annual loss since 2009.

"At 3 percent, we think that's probably fair value," said Gene Tannuzzo, a money manager in Minneapolis at Columbia Management Investment Advisers, which oversees $340 billion. "Sometimes people get so worked up with, 'Oh my God, we were offsides, interest rates have to dramatically reprice,' and then they realize that the repricing has already happened."

The 10-year yield dropped three basis points, or 0.03 percentage point, to 2.97 percent at 4:01 p.m. New York time, according to Bloomberg Bond Trader prices. It climbed to 3.02 percent on Friday, the highest since July 2011. The price of the 2.75 percent security due in November 2023 increased 7/32, or $2.19 per $1,000 face amount, to 98 3/32.

Two-year note yields were little changed at 0.38 percent. Thirty-year bond yields fell as much as four basis points to 3.89 percent after increasing earlier to 3.96 percent, the highest level since August 2011.

The Fed's fixed-rate reverse-repurchase agreement facility drew $102.6 billion, the most since the amount counterparties can post was raised this month, from 75 bidders. That compared with 68 bidders who submitted $95 billion on Dec. 27.

The New York Fed increased counterparties' maximum allotment cap to $3 billion, from $1 billion, and the fixed rate was lowered to three basis points, from five basis points, effective Dec. 23. The central bank has been testing the reverse-repo mechanism as part of its preparations to eventually withdraw record accommodation.

Treasuries rose amid month-end buying. Fixed-income funds that manage portfolios against benchmark indexes, including the Barclays U.S. Aggregate Index, typically purchase longer- maturity Treasuries at almost month-end to align the interest rate sensitivity of their holdings with the indexes.

The Barclays index will extend its duration, the measure of rate-sensitivity, by 0.07 year on Jan. 1, compared with 0.09 year on Dec. 1.

"Buy the dips," said Brian Edmonds, the head of interest- rates trading in New York at Cantor Fitzgerald, one of 21 primary dealers that trade with the Fed. "I don't think we'll ratchet too much higher in rates."

U.S. government securities have lost 3.3 percent this year, according to the Bloomberg U.S. Treasury Bond Index. That compares with a 0.4 percent loss by the Bank of America Merrill Lynch Global Broad Market Sovereign Plus Index.

The annual decline in Treasuries would be the first since they posted a record 3.7 percent drop in 2009. Treasuries due in 10 years or more have slumped more than 12 percent this year, the biggest decline among the 144 government bond indexes globally compiled by Bloomberg and the European Federation of Financial Analysts Societies.

Treasuries traded at almost the cheapest level in more than two years, based on the term premium, a model that includes expectations for interest rates, growth and inflation. The gauge was at 0.59 percent, after reaching 0.64 percent earlier on Monday, the least expensive since May 2011, according to a Columbia Management model. The current reading is above the average of 0.21 percent over the past decade and shows investors see bonds as close to fairly valued.

The benchmark U.S. 10-year yield will end 2014 at 3.40 percent, according to a median estimate of economists in a Bloomberg survey.

The U.S. central bank will reduce monthly bond purchases in $10 billion increments during its next seven meetings before ending the program in December 2014, according to the median forecast of economists surveyed Dec. 19 by Bloomberg News.

The Federal Open Market Committee said at its Dec. 17-18 gathering it will reduce monthly buying of Treasuries by $5 billion to $40 billion, and those of mortgage-backed bonds by $5 billion to $35 billion starting in January.

The Fed announced its schedule of purchases of $40 billion in Treasuries next month, starting on Jan. 6 with as much $1.5 billion in securities maturing between February 2036 and November 2043.

Policy makers also said Dec. 18 "it likely will be appropriate to maintain the current target range for the federal funds rate well past" their 6.5 percent unemployment-rate threshold, especially if inflation stays below the Fed's 2 percent target. The benchmark rate has been in a range of zero to 0.25 percent since December 2008.

The odds of policy makers increasing the interest-rate target by January 2015, based on data compiled by Bloomberg from futures contracts, rose to 19 percent, from 11 percent at the end of November.

Rates on one-month Treasury bills reached a negative level for the sixth-straight day amid rising demand for short-term debt at year-end, according to Bloomberg data. It was the longest stretch since January 2012. The rate touched negative 0.0101 percent on Monday before trading at zero.

A gauge of pending home sales increased 0.2 percent, the first gain in six months, after a 1.2 percent drop in October that was larger than initially reported, the National Association of Realtors said Monday in Washington. The median projection in a Bloomberg survey of economists called for a 1 percent advance.

A Conference Board report on Tuesday will show U.S. consumer confidence increased to a reading of 76.2 this month, from 70.4 percent in November, economists in a Bloomberg survey forecast. U.S. employers added 191,000 jobs in December, another Bloomberg survey projected before Labor Department data due on Jan. 10.

Treasury trading volume at ICAP, the largest inter- dealer broker of U.S. government debt, totaled $154 billion as of 4:01 p.m. Monday. It was $129.6 billion on Dec. 27, compared with an average of $308 billion this year. Trading closed earlier on Dec. 24 and stayed shut the next day for Christmas.

The Securities Industry and Financial Markets Association recommended U.S. Treasuries trading close on Tuesday at 2 p.m. in New York and remain shut on Jan. 1 for New Year's Day.

bc-treasuries