By Dakin Campbell and Lukanyo Mnyanda Dec. 11 (Bloomberg) -- Treasuries rose, pushing yields near record lows, after a government report showed first-time claims for unemployment benefits surged to a 26-year high, fueling demand for relative safety of U.S. debt. Government debt is on pace for a sixth consecutive week of gains after the Labor Department said initial jobless claims rose more than forecast and the number of workers staying on benefit rolls reached the most since 1982. One-month bill rates fell below zero for the first time as investors seek a haven from losses in equity and credit markets. “The weak data is leading the market to think the Fed will still keep rates lower for longer,” said Carl Lantz, an interest-rate strategist in New York at Credit Suisse Securities USA LLC, one of the 17 primary dealers that trade with the Federal Reserve. “It’s too early to think about any type of V- shaped recovery.” The yield on the benchmark 10-year note dropped six basis points, or 0.06 percentage point, to 2.64 percent at 10:56 a.m. in New York, according to BGCantor Market Data. The 3.75 percent security due in November 2018 gained 1/2, or $5 per $1,000 face amount, to 109 21/32. The yield touched 2.505 percent on Dec. 5, the lowest level since at least 1962, when the Fed’s daily records began. The two-year note yield fell four basis points to 0.81 percent. It dropped to a record low of 0.77 percent on Dec. 5. The Treasury will sell $16 billion of 10-year notes today. Treasuries of all maturities have returned 11.9 percent this year, according to Merrill Lynch & Co.’s U.S. Treasury Master Index, the best performance since the securities gained 13.4 percent in 2000. Financial Turmoil Yields on one-month bills fell to minus 0.03 percent, from 0.01 percent yesterday. The government auctioned $30 billion of the securities on Dec. 9 at zero percent for the first time since it began selling them in 2001. Three-month bill rates fell to minus 0.01 percent the same day and were 0.01 percent today. Treasuries surged this year with government bonds across the world as the U.S. housing slump pushed up the cost of credit globally and central banks around the world cut benchmark rates. The monetary authorities in Switzerland, Taiwan, South Korea and South Africa lowered interest rates today. Futures contracts on the Chicago Board of Trade show 88 percent odds the Fed will lower its 1 percent target rate on overnight loans between banks to 0.25 percent on Dec. 16. The probability was 64 percent a week ago. Yield Spread The House of Representatives voted last night to approve emergency loans for General Motors Corp. and Chrysler LLC, shifting the focus to the Senate, where Republican opposition threatens to delay or kill the legislation. “The growing feeling is that the Senate doesn’t have the votes for their bailout, and I think the market is worried about that,” said Tom di Galoma, head of Treasury trading at Jefferies & Co., a brokerage for institutional investors in New York. “If you don’t get this bailout, we will be off to the races again.” The difference in yield, or spread, between two- and 10- year notes was 1.83 percentage points, close to the widest this month and down from a five-year high of 2.62 percentage points on Nov. 13. The $5.3 trillion market for U.S. government debt may be a bubble waiting to burst, according to analysts and investors. Treasuries have “absolutely” entered a bubble, said David Brownlee, who oversees $15 billion as head of fixed income at Sentinel Asset Management in Montpelier, Vermont. “There is very little rationality in my mind to bills trading at zero.” 10-Year Auction The U.S. trade deficit unexpectedly widened in October as faltering global demand led to a third consecutive drop in exports, signaling the American economy is sinking even faster than previously estimated. The gap expanded 1.1 percent to $57.2 billion from a revised $56.6 billion in September, the Commerce Department said in Washington. Gains in debt may be tempered before the Treasury’s 10-year note auction today, part of record debt sales to fund U.S. financial rescues. The Treasury sold $20 billion of the securities on Nov. 12 at a high yield of 3.783 percent, down from as high as 5.21 percent at a sale in June 2007. A $28 billion auction of three-year securities yesterday drew less demand than the previous sale. “Given that we have run so far, so fast, we could see the market give up a bit,” said Martin Mitchell, head government bond trader at the Baltimore unit of Stifel Nicolaus & Co. “I’m not a seller into that; I’m a buyer once the correction happens because I think yields will go lower.” $2 Trillion Private analysts estimate the government’s borrowing needs may reach $1.5 trillion to $2 trillion in the 12 months through Sept. 30, 2009, Treasury Assistant Secretary Karthik Ramanathan said yesterday. The U.S. budget deficit swelled to $164.4 billion in November, the second straight month it widened, the Treasury Department said yesterday. The shortfall was $98.2 billion a year earlier. The “Treasury needs to be prepared to meet additional financing needs if necessary,” Ramanathan said in New York. Public spending and a slowing economy will require “conventional” ways to raise money, such as increasing the size and frequency of debt issuance, selling cash-management bills when short-term funds run low and reintroducing securities when necessary, he said. “Novel approaches” also may be needed, he 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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