By Anchalee Worrachate and Bob Chen Dec. 8 (Bloomberg) -- Treasuries declined as stocks rose after President-elect Barack Obama pledged the biggest U.S. public works plan since the 1950s to stimulate economic growth. Ten-year notes fell for a second day and yields extended an advance from record lows before the Treasury announces today how much it will sell of the securities this week. It will also reveal the size of the auction of three-year debt, the second such sale since May 2007. The MSCI World Index of equities rose 2.7 percent and U.S. stock-index futures gained. “The market is taking a breather after a recent rally because Obama’s pledge lifted sentiment and boosted stocks,” said Kornelius Purps, an interest-rate strategist in Munich at Unicredit Markets and Investment Banking. “It’s likely to be a flash in the pan. A sustained turnaround in the bond market is not possible at this point. The economic outlook is gloomy.” The 10-year note yield climbed nine basis points to 2.8 percent as of 7 a.m. in New York, according to BGCantor Market Data. The price of the 3.75 percent security due November 2018 dropped 26/32, or $8.12 per $1,000 face amount, to 108 8/32. The yield touched 2.505 percent on Dec. 5, the lowest level since at least 1962, when the Fed’s daily records began. The yield on the two-year note increased 10 basis points to 1.02 percent. It dropped to an all-time low of 0.77 percent on Dec. 5. The difference in yield, or spread, between two- and 10- year notes was little changed at 177 basis points. It widened to as much as 262 basis points on Nov. 13. Three-month bill rates were at 0.01 percent, the least since January 1940. ‘Aggressive Steps’ Treasuries are still headed for their best year since 2000 as rising unemployment and slowing economic growth led Obama to say the recession will get worse and “more aggressive steps” will be needed to counter the housing crisis. Traders increased bets the Federal Reserve will lower its target rate on overnight loans between banks to 0.25 percent from 1 percent on Dec. 16 after companies cut workers at the fastest pace in 34 years in November. Futures contracts on the Chicago Board of Trade show 100 percent odds of a 75-basis- points cut, up from 26 percent a week ago. “The Fed will have to cut by 50 basis points to send a message that they are prepared to do everything to prevent the economy from worsening,” said Satoshi Okumoto, a general manager in Tokyo at Fukoku Mutual Life Insurance Co., which has $59.5 billion in assets. “The yield curve should flatten” as investors purchase longer-maturity debt, he said. ‘Substantial Quantities’ Fed Chairman Ben S. Bernanke said last week he has “limited” room to lower interest rates further and may use less conventional policies, such as buying Treasuries, to revive the economy. One option is for the Fed to buy “longer-term Treasury or agency securities on the open market in substantial quantities,” Bernanke said. “This approach might influence the yields on these securities, thus helping to spur aggregate demand.” Japan’s biggest bond investors say Obama has room to unleash a flood of Treasuries without driving up borrowing costs as he tackles the worst economy since World War II. The U.S. is starting to look like Japan in the 1990s, when the Bank of Japan struggled to revive growth as the combination of deflation and recessions stranded the nation in the so-called Lost Decade. Yields on Treasuries are falling as the government sells a record amount of debt to prop up the American economy. Debt Swells U.S. federal debt rose to about 36 percent of GDP in September from 32 percent in 2001, as President George W. Bush raised funds to spur the economy and pay for wars in Iraq and Afghanistan. “History repeats itself,” said Hiroyuki Bando, chief manager for fixed income, equities and currencies in Tokyo at Mitsubishi UFJ Trust & Banking Corp., which manages the equivalent of $200 billion and invests on behalf of Japan’s biggest bank. “Based on our experience in Japan, the same thing will happen in the U.S. The U.S. has more room to borrow.” Bando bought Treasuries, as did Mizuho Asset Management Co., which oversees $41.9 billion and bet all year that inflation in the U.S. will turn into deflation, buoying government debt. JPMorgan Asset Management Japan Ltd., part of the largest U.S. lender, is buying Treasuries, speculating the Federal Reserve will purchase the securities to keep yields down and spur the economy, just as the Bank of Japan did a decade ago. Overseas Holdings Fed holdings of Treasuries on behalf of foreign central banks and other institutions rose 12 percent since September, compared with a 7.7 percent increase last quarter. Treasuries returned 11.7 percent this year, the most since a 13.3 percent gain in 2000, as investors sought the safest securities, according to Merrill Lynch & Co.’s U.S. Treasury Master Index. That compares with a 38 percent loss in the Standard & Poor’s 500 index, including reinvested dividends. European government bonds provided 9.2 percent and Japanese notes 2.1 percent. Ried, Thunberg & Co.’s weekly survey of fund managers for the end of June held at 41 for the seven days ended Dec. 5. The average in the year to date is 45. A reading below 50 means investors anticipate lower Treasuries prices. The 28 fund managers in the survey manage a combined $1.29 trillion. Ried Thunberg, based in Jersey City, New Jersey, is a unit of ICAP Plc, the world’s largest broker of trades between banks. To contact the reporters on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net; Bob Chen in Hong Kong at bchen45@bloomberg.net.

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