Treasuries fell as traders focused on the record amount of government securities slated to be sold this year after a report showed the U.S. jobless rate rose in March to the highest level in 25 years and payrolls tumbled. Government debt has dropped 1.7 percent this year, according to Merrill Lynch & Co.’s U.S. Treasury Master index, as President Barack Obama’s government increases borrowing to record levels to revive economic growth and service record deficits. “We were long coming into the unemployment data and we are going into supply next week,” said Theodore Ake, head of U.S. Treasury trading in New York at Mizuho Securities USA Inc., one of the 16 primary dealers that trade with the Federal Reserve. “That is not a good recipe for getting the market up” The 10-year note yield rose four basis points, or 0.04 percentage point, to 2.82 percent at 8:42 a.m. in New York, according to BGCantor Market Data. Two-year note yields rose two basis points to 0.90 percent. The 10-year yield has remained since the beginning of the year in a range of 2.14 percent to 3.05 percent. The yield, which slid to a record low of 2.04 percent on Dec. 18, averaged 4.25 percent for the past five years. The jobless rate increased to 8.5 percent, as forecast, from 8.1 percent in February, the Labor Department said today in Washington. Employers cut 663,000 workers from staff, bringing total losses since the recession began to about 5.1 million, the biggest slump in the postwar era. Unemployment Treasuries declined after the payrolls reports issued in February and March, even though each showed the loss of more than 500,000 jobs, later revised to a combined 1.3 million. Traders focused instead on the likelihood that the government will issue unprecedented levels of debt this year to spur economic growth. “With the ongoing global supply deluge the longer term preference will be to sell,” John Spinello, chief technical strategist at Jefferies Group Inc. in New York, wrote in a note to clients before the report. Treasuries dropped yesterday as accounting regulators approved a rule change that may boost bank profits and world leaders at the Group of 20 nations summit agreed on plans to fight the worst financial crisis since the Great Depression. “The biggest change in the last month is that government policy has gone from being a source of downside risk to a source of upside risk” for the economy, Tim Condon, head of Asia research with ING Groep NV in Singapore, said in a report today. Inflation Expectations Treasury yields and stocks are both poised to rise, according to ING, the biggest Dutch financial-services company. The spread between rates on 10-year notes and Treasury Inflation Protected Securities, which reflects traders’ outlook for consumer prices, narrowed to 1.36 percentage points before the jobs report, from 1.43 percentage points a week ago. It has averaged 2.26 percentage points for the past five years. After subtracting for consumer prices, the so-called real yield for 10-year notes is about 2.55 percent, more than double the five-year average. The U.S. Treasury is scheduled to sell $6 billion in 10- year inflation-indexed notes on April 7. Deflation, a general drop in prices, would tend to erode demand for TIPS. The Fed plans to buy U.S. securities next week on April 6 and April 7 after purchasing $7.5 billion yesterday. Obama is asking Congress to approve a $3.55 trillion budget for 2010. The nonpartisan Congressional Budget Office estimated the 2010 deficit at $1.38 trillion, higher than the White House’s $1.17 trillion projection. Fed Purchases The Fed’s $1 trillion effort to restart the market for securities backed by loans is encountering resistance from investors, undermining Chairman Ben S. Bernanke’s attempt to further drive down borrowing costs. The Term Asset-Backed Securities Loan Facility may next week fail to see a big increase from its $8.3 billion first round of investor commitments in March, said Reed Auerbach, co- chief executive officer of law firm McKee Nelson LLP in New York. Investors are concerned that Congress, while responding to taxpayer anger over bank bailouts, hasn’t described how the most sweeping regulatory overhaul since the Great Depression will change the ways financial companies turn a profit. “I can do very well for my clients without venturing into federal waters which are inhabited by sharks,” said David Kotok, the chairman of Cumberland Advisors Inc. in Vineland, New Jersey, who manages about $1 billion. “We are leery of doing anything with the federal government.” TED Spread Yields suggest government and central bank efforts are restoring trading in debt markets, though they haven’t recovered to levels before the credit crunch began in 2007. The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, narrowed to 96 basis points before the report, from 2008’s high of 4.64 percentage points in October. It averaged 36 basis points in 2006. U.S. company bonds yielded 7.72 percentage points more than Treasuries, narrowing from 8.04 percentage points at the end of 2008, Merrill’s Corporate & High Yield Master index shows. The spread was 1.42 percentage points 24 months ago.

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