Treasury 10-year notes headed for the biggest weekly rally since December, after the Federal Reserve’s plan to buy as much as $300 billion in government debt led to the largest one-day surge in more than four decades. U.S. securities of all maturities advanced this week on speculation the Fed’s program will put a ceiling on yields after the worst start to a year for Treasuries since 1980. Notes gained the most as the Fed said March 18 its purchases will concentrate on two- to 10-year maturities. Fed Chairman Ben S. Bernanke may say in a speech today the central bank will take additional measures to lower borrowing costs. “It’s been a crazy week,” said Adam Brown, managing director and Treasury trader in New York at Barclays Capital Inc., one of the 16 primary dealers that trade with the Fed. “I would expect a trend toward lower yields.” The yield on the benchmark 10-year yield rose two basis points, or 0.02 percentage point, to 2.61 percent at 11:14 a.m. in New York, according to BGCantor Market data. The price of the 2.75 security due in February 2019 fell 5/32, or $1.56 per $1,000 face amount, to 101 6/32. The 10-year yield fell 28 basis points this week, the most since the five days ended Dec. 19, as the yield plunged from a high of 3.05 percent to a two-month low of 2.46 percent after the Fed’s announcement. The benchmark two-year note’s yield fell one basis point to 0.85 percent. It has declined 11 basis points this week. Stock Gains Stocks rose while crude oil headed for a fifth week of gains, the longest winning streak in 11 months, as investors bet the Fed’s measures will revive the economy. The Standard & Poor’s 500 Index headed for a 3.3 percent five-day gain. Treasuries outperformed German debt on speculation the European Central Bank is unlikely to follow the Fed in purchasing government securities. The yield advantage of 10-year German bunds over Treasuries of comparable maturity widened to 38 basis points from 17 basis points on March 13. Even with the rally in U.S. debt, Treasuries have handed investors a loss of 1.6 percent this year, according to an index compiled by Merrill Lynch & Co. Before the Fed’s announcement, the securities lost 3.4 percent and were headed for the worst three-month period since the third quarter of 1980. Bernanke may signal additional measures the central bank will take to keep down borrowing costs when he speaks on “The Financial Crisis and Community Banking” in Phoenix today. Inflation Fears The U.S. dollar headed for a weekly decline of 4.2 percent against a weighted basket of six major currencies, while gold for immediate delivery is up about 2.5 percent to $952.57 an ounce on concern the Fed’s policy of buying Treasuries will stoke inflation. “We have seen an interesting mood swing from the deflationary psychology to more worries about inflation,” said Jay Mueller, who manages about $3 billion of bonds at Wells Fargo Capital Management in Milwaukee, in a Bloomberg Television interview. “We have seen evidence that long-term inflation is a worry. I do not think it is a concern for 2009.” The difference in yield between 10-year Treasury Inflation- Protected Securities, or TIPS, and comparable securities, known as the breakeven rate, increased to 1.3 percentage points. The rate, which represents traders’ outlook for inflation over the life of the debt, has risen from 0.84 percentage points at the start of last week. Demand for Notes The Fed’s purchases will boost demand for “a very significant amount,” or about 42 percent, of the roughly $680 billion in nominal Treasuries and $28 billion in TIPS set to be issued through the third quarter, according to Morgan Stanley, another primary dealer. The yield on the 10-year note will retest its lows in the “near term,” Morgan Stanley strategists led by Jim Caron wrote yesterday. The 10-year note yield touched a record low of 2.04 percent Dec. 18. The U.S. will sell a record $98 billion of notes next week as it seeks to fund spending aimed at reviving economic growth. The Treasury will auction $40 billion of two-year notes on March 24, $34 billion of five-year debt the next day and $24 billion of seven-year notes on March 26. The 30-year bond yield fell five basis points to 3.63 percent this week. Demand for the security was diminished after investors learned the Fed’s program will concentrate on notes maturing in fewer than 10 years. Credit Markets Policy makers have yet to bring down consumer borrowing rates or unfreeze credit markets. The difference between rates on 30-year fixed mortgages and 10-year Treasuries was 2.2 percentage points, Bloomberg data show. That’s up from an average of 1.75 percentage points in the decade before the subprime-mortgage market collapsed in 2007. Money-market rates show banks are more willing to lend to each other. The London interbank offered rate, or Libor, that banks say they charge each other for three-month loans, was 1.22 percent yesterday, according to the British Bankers’ Association. It touched 1.33 percent last week, the highest since Jan. 8. The difference between what banks and the Treasury pay to borrow for three months, the TED spread, narrowed to 103 basis points, after last week touching a two-month high of 113 basis points. It averaged 27 basis points from 2002 through 2006.

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