By Cordell Eddings and Paul Dobson June 3 (Bloomberg) -- Treasuries fell for a second day on speculation tomorrow’s U.S. employment report will show the economic recovery is gaining momentum, reducing demand for relative safety. The drop in bonds pushed the yield on the 10-year note to the highest level in two weeks before the Labor Department’s figures, which are forecast by economists to show payrolls grew last month by the most since 1983. Global stocks rose on the prospects for the world’s largest economy. “The market is trending lower as equities continue to firm and the fear trade continues to recede a bit before tomorrow’s big number,” said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut. The 10-year note’s yield climbed six basis points, or 0.06 percentage point, to 3.40 percent at 8:52 a.m. in New York, according to BGCantor Market Data. The yield earlier reached 3.42 percent, the highest level since May 18. The 3.5 percent security due in May 2020 fell 1/2, or $5 per $1,000 face amount, to 100 26/32. Treasuries returned 1.7 percent last month, the most since March 2009, according to Bank of America Merrill Lynch indexes, on speculation the European debt crisis may slow global growth and inflation. The U.S. economy added 515,000 jobs in May after an increase of 290,000 in the previous month, according to the median forecast of 81 economists in a Bloomberg News survey. The unemployment rate dropped to 9.8 percent from 9.9 percent, according to the median forecast in a separate survey before tomorrow’s report from the Labor Department. Housing Market Treasuries fell yesterday after data showed pending U.S. home resales increased in April more than economists forecast and stocks rallied. “Global rates markets had largely been held hostage to developments in European credit over the past month or so, but U.S. Treasuries will now be more led by the economic data,” Ciaran O’Hagan, a fixed-income strategist at Societe Generale SA in Paris, wrote in a research note today. “Pending home sales were strong in April. It confirms a series of data points which show that the U.S. economy is performing better for now.” America’s companies increased employment by 55,000 jobs last month after the addition of a revised 65,000 positions in April, ADP Employer Services reported today. The median forecast of 34 economists in a Bloomberg News survey was for an increase of 70,000. Jobless Claims Initial jobless claims dropped by 10,000 to 453,000 in the week ended May 29, Labor Department figures showed today. Economists surveyed by Bloomberg News projected claims would fall to 455,000, according to the median forecast. The number of people receiving unemployment insurance and those getting extended payments increased. Inflation expectations are reviving as the recovery signs accumulate, with the difference between yields on 10-year notes and Treasury Inflation Protected Securities at 2.06 percentage points. The difference, the so-called break-even rate, was 1.83 percentage points on May 21, the lowest level since October. Federal Reserve Bank of Atlanta President Dennis Lockhart said the central bank, to counter inflation, may eventually need to raise its target interest rate from near zero even with U.S. unemployment still high. “The policy rate may have to begin to rise even while unemployment is considerably higher than before the recession,” Lockhart said today in a speech in Atlanta. “Good policy, even in circumstances of unacceptable levels of unemployment, may incorporate higher interest rates.” Reduced Borrowing Treasuries rose in the past two months as the government scaled back borrowing to finance annual budget deficits exceeding $1 trillion. Nine of the 18 primary dealers required to bid at U.S. auctions estimate the Treasury will sell $37 billion in three- year debt, $20 billion in 10-year notes and $13 billion in 30- year bonds over three days beginning June 8. The $70 billion total would be down from $78 billion in the week of May 10. Bond dealers expect the 2010 budget deficit to be smaller than the official $1.6 trillion White House forecast, and the Treasury indicated that tax revenue is increasing as the economy recovers from a recession. The Treasury will announce the sizes of the note and bond auctions at 11 a.m. New York time. To contact the reporters on this story: Cordell Eddings in New York at ceddings@bloomberg.net; Paul Dobson in London at pdobson2@bloomberg.net

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