By Cordell Eddings March 26 (Bloomberg) -- Treasury 10-year note yields traded at almost the highest level since June as evidence of a U.S. economic recovery reduced demand for the relative safety of government debt. The yields were headed for their biggest weekly advance this year before a report that economists said will show U.S. consumer confidence was higher this month than a previous estimate indicated. Ten-year yields stayed above equivalent- maturity interest-rate swaps for a fourth day. “We’ve had considerable cheapening,” said Christopher Sullivan, who oversees $1.6 billion as chief investment officer at United Nations Federal Credit Union in New York. “The market is waiting to see if consumer confidence may have an effect.” The 10-year yield increased 2 basis points, or 0.02 percentage point, to 3.90 percent at 9:27 a.m. in New York, according to BGCantor Market Data. The price of the 3.625 percent security due in February 2020 dropped 1/8, or $1.25 per $1,000 face amount, to 97 25/32. The yield advanced to 3.92 percent yesterday, the highest level since June 11. A drop in the 10-year note this week has driven the yield up 20 basis points, the biggest increase since the week ended Dec. 25, as record-tying $118 billion note auctions drew lower- than-average demand. Treasuries have lost 1.3 percent this month, paring their first-quarter returns to 0.7 percent, according to Bank of America Merrill Lynch indexes. U.S. Economy The U.S. economy expanded at a 5.6 percent annual rate in the fourth quarter of 2009, figures from the Commerce Department showed today in Washington. The increase, while smaller than the government’s previous estimate issued last month, marked the best performance in six years. The Reuters/University of Michigan final consumer sentiment index for this month was 73 after a reading of 73.6 in February, according to the median forecast of 64 analysts in a Bloomberg survey. The preliminary reading for the measure, released on March 12, was 72.5. The report is due to be released at 9:55 a.m. New York time. The nine-day relative strength index on the 10-year Treasury note yield climbed to 76 today, the highest level since December, according to Bloomberg data. Readings of 70 or above typically indicate yields are poised to fall. The three-decade rally in fixed income may have run its course, said Bill Gross, who runs the world’s biggest bond fund, said. The co-chief investment officer at Pacific Investment Management Co. said in a Bloomberg Radio interview with Tom Keene yesterday from Pimco’s headquarters in Newport Beach, California, that excess borrowing in nations including the U.S., U.K. and Japan will eventually lead to inflation. Swap Spreads U.S. interest-rate swap spreads plunged this week to the lowest levels in more than two decades after Fitch Ratings’ downgrade of Portugal sparked concern that European nations will struggle to contain deficits. The gap between the rate to exchange floating- for fixed- interest payments and comparable-maturity Treasury yields for 10 years was negative 6.6 basis points after reaching negative 10.19 basis points yesterday, the lowest level since at least 1988, when Bloomberg began collecting the data. A negative swap spread means the Treasury yield is higher than the swap rate, which typically is greater given that the floating payments are based on interest rates that contain credit risk, such as the London interbank offered rate. The Libor that banks charge each other to borrow in dollars for three months rose today to 0.28875 percent, the highest level since September. Government Auctions Demand waned at this week’s auctions of two-, five- and seven-year notes as signs of improvement in the economy boosted appetite for higher-yielding assets. At the seven-year sale yesterday, investors bid for 2.61 times the amount of debt on offer, the least in 10 months. “There doesn’t seem to be much love for Treasuries at the moment,” said Moyeen Islam, a fixed-income strategist at Barclays Plc in London. “There have been three auctions this week of quite short-dated paper, and all three have been quite difficult for the market to take down.” President Barack Obama has increased U.S. marketable debt to a record $7.4 trillion as he borrows to sustain the economic expansion. The Fed plans to keep interest rates at a record low for an “extended period” after cutting the target rate for overnight lending between banks to a range of zero to 0.25 percent in December 2008. “The economy continues to require the support of accommodative monetary policies,” Federal Reserve Chairman Ben S. Bernanke said yesterday in the text of congressional testimony. The central bank will be ready to tighten credit “at the appropriate time,” he said. To contact the reporter on this story: Cordell Eddings in New York at ceddings@bloomberg.net

Source