May 26 (Bloomberg) -- Treasuries pared their first losses in three days after U.S. stocks reversed an advance and tumbled on reports that China may consider reducing investments in European government bonds.

Bonds earlier plunged, pushing 10-year yields up from yesterday’s one-year low, as signs the economic recovery is on course reduced demand for the safety of government debt. U.S. new-home sales and durable-goods orders climbed. The Organization for Economic Cooperation and Development raised growth forecasts for this year and next. The Treasury sold $40 billion of debt, its second of three note sales this week.

“The article about China reviewing its euro-zone debt holdings sent the stock market reeling, and the bond market came roaring back,” said Michael Franzese, managing director and head of Treasury trading at Wunderlich Securities in New York.

The yield on the current 5-year note rose 2 basis points to 2.02 percent at 4:50 p.m. in New York, according to BGCantor Market Data. Earlier it increased as much as 14 basis points. The 2.5 percent security due in April 2015 fell 3/32, or 94 cents per $1,000 face amount, to 102 1/4.

The benchmark 10-year note yield increased 3 basis points to 3.19 percent after earlier rising as much as 11 basis points. It touched 3.06 percent yesterday, the lowest level since April 29, 2009. A basis point is 0.01 percentage point.

U.S. stocks dropped, with the Standard & Poor’s 500 Index reversing a 1.6 percent advance. The Financial Times said Chinese officials have been meeting with foreign bankers to review holdings of European debt in light of the region’s financial crisis. Reuters quoted Gao Xiqing, head of China’s sovereign-wealth fund, as saying he plans to keep investments in Europe. The S&P 500 was down 0.6 percent at closing.

Bailout Package

European leaders agreed this month to a bailout plan worth almost $1 trillion to stop the debt crisis that began in Greece from spreading. Greece pledged to take austerity measures.

“Fear is rampant again and there are no buyers of stocks, so Treasuries have rebounded off their lows,” said Tom Roth, senior Treasury trader in New York at Mitsubishi UFJ Financial Group Inc.

The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.71, versus an average of 2.57 for the previous 10 sales.

Foreign Central Banks

Indirect bidders, an investor class that includes foreign central banks, purchased 40.6 percent of the notes, compared with an average of 48 percent for the past 10 sales. Direct bidders, non-primary dealers that place their bids directly with the Treasury, bought 15 percent of the securities, compared with an average of 8 percent at the past 10 auctions.

“It doesn’t show overwhelming response at these levels,” said Kevin Flanagan, a Purchase, New York-based fixed-income strategist for Morgan Stanley Smith Barney. “They are getting done, they are not showing disappointing results, but at these levels you have priced in a lot of bad news. All these auctions will show there’s sponsorship, but we’re not seeing the same level of sponsorship as we saw a month or two ago.”

Today’s offering was $2 billion less than the record $42 billion sold at each of the past six auctions of five-year notes, the first reduction since December 2006.

The Treasury sold $42 billion in 2-year debt yesterday and will auction $31 billion in seven-year securities tomorrow.

‘Only Way Out’

Pacific Investment Management Co.’s Bill Gross said restrictive lending rates and austerity measures that slow growth will leave Greece with the “only way out” of a debt restructuring.

“The growth required in order to shoulder Greece’s debt burden is so excessive and the fiscal restrictiveness being imposed on the country is so restrictive there will be no way out,” Gross said, in an interview with Bloomberg Television. “Restructuring at some point down the road -- perhaps a year or two years down the road -- will take place.”

New-home sales in April climbed 15 percent to an annual pace of 504,000, the most since May 2008, after surging a revised 30 percent the prior month, figures from the Commerce Department showed today in Washington.

Orders for durable goods rose in April for the fourth time in five months. The 2.9 percent increase in bookings for goods meant to last at least three years was the biggest in three months, another Commerce report showed today. Orders excluding transportation fell after revisions showed even bigger gains in prior months.

The economy of the OECD’s 30 members will grow 2.7 percent this year, more than the 1.9 percent predicted in November, the Paris-based group said. The U.S. economy will grow 3.2 percent in 2010 and next year instead of the 2.5 percent predicted in November, the OECD said.

--Editors: Greg Storey, Michael Weiss

To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net; Cordell Eddings in New York at ceddings@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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