By Dakin Campbell and Lukanyo Mnyanda Dec. 10 (Bloomberg) -- Treasuries fell, snapping a rally that pushed three-month bill rates below zero, ahead of $44 billion in note sales amid concern the government’s need to fund the financial system’s rescue will flood the market with debt. The declines pushed yields higher as the U.S. Treasury prepared to auction $28 billion of three-year notes today and $16 billion of 10-year securities tomorrow. U.S. stock-index futures rose on speculation lawmakers will approve a $15 billion bailout to keep automakers afloat. Rates on three-month bills rose after turning negative yesterday for the first time. “We have a lot of supply coming up,” said Thomas Roth, head of U.S. government bond trading in New York at Dresdner Kleinwort, one of 17 primary dealers that trade with the Federal Reserve. “We have priced in a lot of bad news, and maybe that will all come to fruition, but maybe it won’t. The market is priced very richly and setbacks from these levels would not be surprising.” The yield on the benchmark 10-year note rose eight basis points, or 0.08 percentage point, to 2.73 percent at 9:10 a.m. in New York, according to BGCantor Market Data. The price of the 3.75 percent security due in November 2018 fell 3/4, or $7.50 per $1,000 face amount, to 108 25/32. The yield on the two-year note increased six basis points to 0.90 percent. The rate on three-month bills was 0.01 percent after falling to minus 0.01 percent yesterday as investors sought the safety of government securities with the shortest maturities toward year-end. The Treasury sold $27 billion of the securities on Dec. 8 at a high discount rate of 0.005 percent, the lowest since it started auctioning them in 1929. TED Spread Demand for government debt also slumped as banks showed less reluctance to lend. The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, fell nine basis points to 209 basis points, the least in two weeks. It was as wide as 464 basis points on Oct. 10 and averaged 38 basis points in the year before the credit crunch began in August 2007. Treasuries have returned 11.9 percent this year, according to Merrill Lynch & Co. indexes. During that time, the three- month bill rate declined from 3.24 percent, while the yield on the benchmark 10-year note fell from 4.02 percent. “There could be some unwinding of positions because the yield right now is too low to buy,” said Yasutoshi Nagai, chief economist in Tokyo at Daiwa Securities SMBC Co., part of Japan’s second-largest brokerage. Demand for bonds will remain low as long as the 10-year yield stays below 3 percent, he said. Stock Gains The yield on the 10-year will rise to 3.66 percent by the end of 2009, according to 50 economists surveyed by Bloomberg. The two-year note yield will also increase, to 1.78 percent, during the same period, economists forecast. Japan’s Nikkei 225 Stock Average advanced for a third day as congressional Democrats and White House negotiators agreed on the outlines of a $15 billion plan to give General Motors Corp. and Chrysler LLC federal loans to stay in business. The MSCI World Index of stocks rose 0.4 percent and futures on the Standard & Poor’s 500 Index increased 1 percent. “Today’s action is related to the stocks rally, which generally means a sell-off in Treasuries,” said Giuseppe Maraffino, a bond strategist in Milan at UniCredit Markets & Investment Banking, a unit of Italy’s largest bank. Investors should favor longer-maturity bonds to take advantage of higher yields and as the deepening economic slump pushes inflation lower, Maraffino said, without providing a specific yield forecast. The decline in Treasuries may be limited after the cost of protecting corporate bonds in Europe and the Asia-Pacific region from default rose, analysts said. Negative Sentiment Sentiment among investors in Treasury notes turned negative this week for the first time in four months, a survey of clients by JPMorgan Securities Inc. showed yesterday. The weekly survey showed the net percentage of investors betting on rising U.S. note prices fell to minus 6 percent as of Dec. 8, from 13 percent the previous week. The figure is the difference between the percentage of investors holding long positions, or bets on higher prices, and those taking short positions, bets on falling prices. The U.S. may sell as much as $1.5 trillion in debt as the budget deficit approaches $1 trillion in the 2009 fiscal year, according to Bank of America Corp. The Federal Reserve may issue debt for the first time and has approached Congress on the subject, the Wall Street Journal reported, citing officials familiar with the situation. Officials are considering issuing Fed debt to help the central bank manage trillions of dollars of lending and investing, the newspaper said. To contact the reporters on this story: Dakin Campbell in New York at dcampbell27@bloomberg.net; Lukanyo Mnyanda in London at lmnyanda@bloomberg.net.

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