Ten-year Treasuries fell for a fourth day, pushing yields to near 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 benchmark note yields 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 he favors a $775 billion economic package. This year’s note sales begin with $8 billion of 10-year Treasury Inflation Protected Securities today. “Treasuries are being driven lower by the massive supply issues in the U.S. and the staggering size of Obama’s stimulus package,” said David Keeble, head of fixed-income strategy in London at Calyon, the investment-banking unit of Credit Agricole SA. “The impression seems to be that the U.S. will be the first major economy to come out of recession and that of course is hurting Treasuries.” The yield on the 10-year note rose three basis points to 2.51 percent by 7 a.m. in New York, according to BGCantor Market Data. The 3.75 percent security due November 2018 fell 9/32, or $2.81 per $1,000 face amount, to 110 25/32. The two-year yield increased six basis points to 0.84 percent. U.S. yields indicate forecasts for inflation, which erodes the value of bonds’ fixed payments, are tumbling. 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, narrowed to 14 basis points from 2.54 percentage points six months ago. Investor Demand 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 Jan. 8, met with congressional leaders from both parties at the Capitol in Washington to help craft a two-year plan to boost growth. “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.” Shinkong Life, with $30 billion in assets, sold Treasuries last week, Yang said. 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 a peak of 4.64 percentage points in October. Hong Kong’s three-month interbank rate, or Hibor, fell to 0.89 percent, the lowest since 2005, from 0.9 percent yesterday. Singapore’s three-month rate for U.S. funds declined one basis point to 1.41 percent, not seen since 2004. 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. in Washington. Fed officials are focused on driving down the spreads between Treasury yields and consumer and corporate loans, in a bid to further ease the lending squeeze. Jobs Report Notes will probably recoup losses and rally after the Labor Department’s employment report 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.” 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 67 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. in New York. ‘Rally Again’ “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 Fed does with short-term borrowing costs, haven’t risen as fast. The spread between two- and 10-year rates has widened to 1.67 percentage points, from 1.25 percentage points on Dec. 26.

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