Treasuries fell, and 10-year yields approached the highest level in three weeks, as the U.S. prepared to sell a record amount of debt to pay for government efforts to snap the recession. U.S. spending plans pushed yields on the benchmark notes up almost half a percentage point in less than a week, the biggest increase since October. Yields climbed after President-elect Barack Obama told House Speaker Nancy Pelosi yesterday that he favors a $775 billion economic package. This year’s note sales begin with $8 billion of 10-year Treasury Inflation Protected Securities today. “Yields will rebound,” said Kevin Yang, a fund manager at Shinkong Life Insurance Co. in Taipei, Taiwan’s second-largest life insurer. “The Obama plan and supply will control the market in the first half of 2009.” The 10-year yield rose three basis points to 2.50 percent as of 2 p.m. in Tokyo, according to BGCantor Market Data. The price of the 3.75 percent security maturing in November 2018 fell 1/4, or $2.50 per $1,000 face amount, to 110 27/32. Two-year rates increased five basis points to 0.82 percent. Shinkong Life, with $30 billion in assets, sold Treasuries last week, Yang said. The MSCI Asia Pacific Index of regional shares rose 0.2 percent, its ninth straight gain. Inflation Outlook U.S. yields indicate forecasts for inflation, which erodes the value of bonds’ fixed payments, are falling. The difference between rates on 10-year TIPS, and conventional notes, which reflects the outlook among traders for consumer prices, narrowed to 12 basis points from 2.54 percentage points six months ago. At the last 10-year TIPS sale on Oct. 8, investors bid for 2.22 times the amount of debt on offer. The average for the past 10 auctions is 1.95. This week’s sales include a record $30 billion of three- year notes tomorrow and $16 billion of 10-year conventional debt the next day. The Treasury Department has estimated it will auction as much as $2 trillion of debt this fiscal year, which began Oct. 1. U.S. marketable debt climbed to $5.82 trillion in November, the most ever, from $4.54 trillion a year earlier. Obama, who plans to deliver a speech on the economy on Jan. 8, met with congressional leaders from both parties at the Capitol in Washington to help craft a two-year plan to boost growth. TED Spread Yields suggest banks are becoming more willing to lend. The difference between what banks and the Treasury pay to borrow for three months, the so-called TED spread, narrowed to 1.29 percentage points, from 2008’s high of 4.64 percentage points in October. The Federal Reserve Bank of New York started buying mortgage-backed securities yesterday as part of a $500 billion program to support the U.S. housing market. The U.S. central bank cut its target for overnight loans between banks to a range of zero to 0.25 percent on Dec. 16. It is scheduled to release the minutes of that meeting at 2 p.m. today in Washington. Notes will probably recoup losses and rally after the Labor Department’s employment report on Jan. 9 because it will show U.S. job losses are deepening, said John Lonski, chief economist at Moody’s Capital Markets Group in New York. Ten-year yields may drop to 2 percent, Lonski said in an interview yesterday. “There’s a very good chance that that will happen, especially after Friday’s report on payrolls that in all likelihood is going to be a scary figure.” Jobs Report Payrolls fell 500,000 in December, bringing last year’s job losses to 2.4 million, the most since 1945, according to the median estimate of economists surveyed by Bloomberg News. The Institute for Supply Management’s index of non- manufacturing businesses, which make up almost 90 percent of the U.S. economy, dropped to 36.5, the lowest level since records began in 1997, a separate survey showed. The data are due to be released at 10 a.m. today New York time. “The market will rally again,” said Kei Katayama, who oversees $1.6 billion of non-yen debt as leader of the foreign fixed-income group in Tokyo at Daiwa SB Investments Ltd., part of Japan’s second-biggest investment bank. “Consumer spending will worsen because of the employment situation.” Katayama said he added to his Treasury holdings in October and November. Longer maturities led the decline. Two-year yields, which are influenced more by what the Federal Reserve does with short- term borrowing costs, haven’t risen as fast. The spread between two- and 10-year rates widened to 1.69 percentage points from 1.25 percentage points on Dec. 26. “The long end of the curve is under a lot of pressure,” Richard Bryant, a trader of 30-year bonds at Citigroup Global Markets Inc., one of the 17 primary government security traders that deal with the Fed, said yesterday. To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.

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