Treasurys declined after the $35 billion auction of five-year securities attracted the lowest demand in six months.

The two-year note yield increased to the highest level since June as primary dealers ended up with their biggest share of an auction of the five-year maturity since July 2009. U.S. debt due in more than a year was headed for the biggest monthly loss in the global government bond market.

“The auction was much weaker than expected, and primary dealers had to take down much more than normal,” said Rohit Garg, an interest-rate strategist in New York at BNP Paribas Securities SA, one of the 18 primary dealers obligated to bid at Treasury auctions. “That is weighing on the Treasury market.”

The yield on the current five-year note increased nine basis points, or 0.09 percentage point, to 2.12 percent at 1:33 p.m. in New York, according to BGCantor Market Data. The price of the 1.375 percent security maturing in November 2015 fell 14/32, or $4.38 per $1,000 face amount, to 96 17/32.

The five-year note yield reached 2.16 percent on Dec. 16, the highest level since June 3, advancing from the record low of 1.0148 percent touched on Nov. 4. The yield dropped three basis points yesterday following the strongest demand at a two-year note auction in three months.

The benchmark 10-year note yield advanced as much as 12 basis points to 3.45 percent today in the biggest intraday gain since Dec. 14. The two-year note yield increased as much as 10 basis points to 0.7433 percent, the highest since June 21.

Bond Losses

U.S. notes and bonds have handed investors a 2.1 percent loss in December, paring the annual return to 5.7 percent, according to figures compiled by Bloomberg and the European Federation of Financial Analysts Societies. That’s the worst monthly performance among 26 sovereign indexes.

The auction of the December 2015 maturity today drew a yield of 2.149 percent, compared with the average forecast of 2.133 percent in a Bloomberg News survey of 9 primary dealers. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.61, the lowest since 2.58 in June.

Primary dealers bought 58.2 percent of the auction, the most since they purchased 61.6 percent in July 2009. Indirect bidders, an investor class that includes foreign central banks, purchased 35.6 percent of the notes, compared with 31.5 percent at the Nov. 23 sale and an average of 42.3 percent for the past 10 sales.

Two-Year Auction

Treasurys rallied yesterday after the U.S. government’s $35 billion auction of two-year securities drew strong demand. Bidding was 3.71 times the debt available, the highest since a reading of 3.78 on Sept. 27. The U.S. plans to sell $29 billion of seven-year debt tomorrow.

An index of global bonds was poised to fall for a fourth month, the longest decline in two years, on speculation quickening economic growth will lead stocks to outperform debt in 2011. The gauge has declined 2.2 percent since the end of August, according to Bank of America Merrill Lynch figures.

The Standard & Poor’s 500 Index has returned 20 percent during the period, according to data compiled by Bloomberg. The index was little changed today.

Retail sales, excluding autos, rose 5.5 percent from Nov. 5 through Dec. 24, said MasterCard Advisors’ SpendingPulse, which measures retail sales by all payment forms. That compared with a 4.1 percent gain a year earlier. The numbers include sales made over the Internet.

Economic Outlook

“The economic recovery should continue into the new year, sending the unemployment rate down to 8.6 percent at the end of 2011,” said Michael Pond, co-head of interest-rate strategy at Barclays Plc in New York, in an interview with Deirdre Bolton on Bloomberg Television’s “InsideTrack” program.

Employers added fewer jobs than forecast in November, and the unemployment rate rose to 9.8 percent, the Labor Department reported Dec. 3.

The Conference Board’s consumer sentiment index unexpectedly decreased to 52.5 this month from a revised 54.3 in November, the New York-based research group reported today. The median forecast of 61 economists in a Bloomberg News survey was for an increase to 56.3 from a previously reported 54.1.

The S&P/Case-Shiller index of property values fell 0.8 percent in October from a year earlier in the biggest year-over- year decline since December 2009. The decrease exceeded the 0.2 percent drop projected by the median forecast of economists surveyed by Bloomberg News.

The difference between rates on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the securities, has widened to 2.29 percentage points from 2.11 percentage points on Nov. 30. The five-year average is 2.09 percentage points.

The Fed bought $6.78 billion of Treasurys maturing from July 2013 through November 2014 today as part of its effort to add $600 billion to the economy through June under the second round of quantitative easing.