By Gavin Finch Dec. 3 (Bloomberg) -- Treasuries snapped a week of gains as traders judged the rally that pushed yields to record lows was unsustainable given U.S. government efforts to revive the economy. Government bonds fell for the first time in more than a week, pushing the yields on two-, five-, 10-, and 30-year maturities up from near the lowest levels since the Treasury began regular sales. Debt slipped after St. Louis Federal Reserve President James Bullard said he sees a “more V-shaped” recovery next year, with consumers recovering more quickly from the recession than many private forecasters are predicting. “After such a tremendous rally it’s hardly surprising to see a little tiredness settle in,” said David Keeble, the London-based head of fixed-income strategy at Calyon, the investment-banking unit of France’s Credit Agricole SA. “Bullard’s surprisingly hawkish speech is also restraining demand. We’re still very much in a firm up trend though.” The two-year yield rose five basis points to 0.95 percent by 10:30 a.m. in London, according to BGCantor Market Data. The 1.25 percent security due November 2010 declined 3/32, or 94 cents per $1,000 face amount, to 100 19/32. The yield dropped to a record 0.85 percent on Dec. 1. The yield on the 10-year note was four basis points higher at 2.74 percent, near the lowest level since the Fed started keeping daily records in 1962. Three-year yields advanced six basis points to 1.16 percent, after reaching 1.09 percent yesterday, a low based on weekly records of the security that the Fed began in 1962. Momentum Gauge A gauge of momentum used by traders to predict a change in price direction indicates 10-year notes are at so-called overbought levels, signaling the week’s rally is poised to end. The 14-day relative-strength index for the December 10-year note futures contract reached 77.97. Readings above 70 indicate prices are likely to fall, while those below 30 indicate they’re likely to rise. The yield dropped to a record yesterday, losing 25 basis points since the end of last week. “We’re not going to buy at these levels,” said Marc Fovinci, head of fixed income at Ferguson Wellman Capital Management Inc. in Portland, Oregon, who helps invest $2.8 billion. “At some point there’s going to be a ray of hope for the economy. Fear will go away and all the support for Treasuries will evaporate.” Fovinci said he sold Treasuries last month. Two-year government securities have yielded less than the Federal Reserve’s 1 percent target for overnight bank loans for the past three days. The three-month bill rates were 0.05 percent. Fed Package The Fed yesterday extended the term of three emergency-loan programs to April 30 from Jan. 30. Congress is considering making loans to General Motors Corp., the maker of Chevrolets and Hummers, and other automakers. The government has arranged a $700 billion plan to rescue banks and an $800 billion program to unfreeze credit for homebuyers and small businesses. Yields fell to records this week after Fed Chairman Ben S. Bernanke said on Dec. 1 the central bank may purchase Treasuries to keep long-term borrowing costs down. Traders increased bets that Bernanke and his colleagues will cut interest rates at their next meeting Dec. 16 by at least a half percentage point to 0.5 percent. “The Fed may be able to keep yields from rising,” said Hiroyuki Bando, chief manager for fixed income, equities and currencies in Tokyo at Mitsubishi UFJ Trust & Banking Corp., part of Japan’s biggest bank. “We can’t find anything good about the economy in the economic indicators.” ISM Report The Institute for Supply Management’s index of non- manufacturing businesses, which make up almost 90 percent of the U.S. economy, was 42 in November, the lowest level since records began in 1997, according to the median forecast in a Bloomberg News survey before the report today. Readings below 50 indicate a contraction. Futures on the Chicago Board of Trade showed 38 percent odds the Fed will lower its 1 percent target rate by 75 basis points as of late yesterday in New York, rising from 26 percent the day before. The rest of the bets are for a half-point cut. Investors also sought long-term U.S. securities this week after the Fed said Nov. 21 it will buy as much as $600 billion of mortgage debt, fueling demand for Treasuries to replace bonds backed by home loans that may be repaid early. Investors in November pushed returns to 5.4 percent, a Merrill index shows. U.S. government debt surged 11.6 percent this year, the most since 2000. The difference between rates on 10-year Treasury Inflation Protected Securities, or TIPS, and conventional notes, which reflects the outlook among traders for consumer prices, was 41 basis points. The spread narrowed from this year’s high of 268 basis points in March. Money-market rates suggest banks are reluctant to lend. The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, widened to 216 basis points from this year’s low of 76 basis points in May. The spread reached 464 basis points on Oct. 10, the most since Bloomberg began tracking the figure in 1984. To contact the reporters on this story: Gavin Finch in London at gfinch@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net

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