Longer-term Treasuries fell for a fourth day, pushing yields on 10-year notes to the highest in three weeks, as concern the U.S. will sell record amounts of debt drove investors from the safety of government securities. Benchmark 10-year note yields increased almost half a percentage point in a week, the most since September, on U.S. spending plans. Yields on notes and bonds 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, or TIPS, today. “We saw tremendous gains last year and a lot of flight to quality built in, and now we are seeing some of that get sucked out of the marketplace,” said Tom Tucci, head of U.S. government bond trading in New York at RBC Capital Markets, the investment-banking arm of Canada’s biggest lender. The yield on the 10-year note rose 11 basis points, or 0.11 percentage point, to 2.58 percent at 10:08 a.m. in New York, according to BGCantor Market Data. It touched 2.6 percent, the highest since Dec. 15. The 3.75 percent security due November 2018 fell 31/32, or $9.69 per $1,000 face amount, to 110 4/32. The 30-year bond’s yield rose eight basis points to 3.11 percent. The two-year note’s yield increased nine basis points to 0.86 percent. “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, Credit Agricole SA’s investment-banking unit. ISM Report Longer-term Treasuries extended losses after the Institute for Supply Management’s index of non-manufacturing businesses, which make up almost 90 percent of the economy, rose to 40.6 from a record-low 37.3 the prior month, the Tempe, Arizona-based ISM said. Readings below 50 signal contraction. The median forecast in a Bloomberg News survey of economists was for a drop to 36.5. Yields indicate forecasts for inflation, which erodes the value of bonds’ fixed payments, are tumbling. The difference between rates on 10-year TIPS and comparable conventional notes, which reflects the outlook among traders for consumer prices, narrowed to eight 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 ratio for the past 10 auctions is 1.95. This week’s sales also include a record $30 billion of three-year notes tomorrow and $16 billion of 10-year conventional debt the next day. $2 Trillion The U.S. may borrow as much as $2 trillion in the 12 months ending on Sept. 30, Treasury Assistant Secretary Karthik Ramanathan said Dec. 10, citing analysts’ estimates. That compares with $892 billion in notes and bonds sold during the last fiscal year. 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. Investors and companies snapped up Treasuries in December amid concern the credit crisis, which has led to $1 trillion in losses, would lead to a cash crunch at year-end. In the new year, investors and traders are taking on more risk and trimming their holdings of government debt. 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. Driving Down Spreads 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. Fifteen-year fixed-rate mortgages were at 5.06 percent last week, 2.59 percentage points above 10-year Treasury yields; the spread averaged 0.88 point in 2003, when the central bank slashed rates to 1 percent. 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 1.27 percentage points, from a peak of 4.64 percentage points in October. Sentiment among investors in Treasuries turned positive for the first time in a month, according to a JPMorgan Securities Inc. survey of clients. The firm’s weekly index rose to 3 on Jan. 6, from last week’s minus 2. The figure is the difference between the percentage of investors betting U.S. securities prices will rise and those expecting a decline. 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 67 economists surveyed by Bloomberg News. “As long as the Fed continues to be involved and keeps rates low by going in and buying paper as they did in mortgages yesterday” long-term Treasury yields will stay low, said Andrew Brenner, co-head of structured products and emerging markets in New York at MF Global Inc. “I’m not so sure we are in a bubble.” Two-year note yields, which are influenced more by what the Fed does with short-term borrowing costs, haven’t risen as fast as those on longer-term securities. The spread between two- and 10-year rates has widened to 1.71 percentage points, from 1.25 percentage points on Dec. 26.

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