Treasuries fell, pushing yields to the highest level in two months, before a Commerce Department report that economists said will show U.S. retail sales advanced in October. Federal Reserve Bank of Richmond President Jeffrey Lacker said the central bank may need to tighten monetary policy even with an elevated U.S. unemployment rate to avoid a surge in inflation. The Fed is scheduled to buy Treasuries every day this week under its plan to pump $600 billion into the economy through June. “There are signs of hope,” in the U.S. economy, said Roger Bridges, who oversees the equivalent of $11.9 billion in Sydney as head of debt at Tyndall Investment Management Ltd., part of Australia’s largest insurer. “It’s not perfect, but it’s not doing as badly as people thought three months ago.” He is holding a smaller percentage of Treasuries than what’s in the benchmark index he uses to gauge performance. Benchmark 10-year yields increased two basis points to 2.81 percent as of 1:17 p.m. in Tokyo, according to BGCantor Market Data. The 2.625 percent security due in November 2020 declined 6/32, or $1.88 per $1,000 face amount, to 98 3/8. Yields were as high as 2.82 percent, a level not seen since Sept. 13. They climbed 26 basis points last week, the steepest increase this year. Five-year rates advanced six basis points today to 1.44 percent. A basis point is 0.01 percentage point. Ireland is in talks with European officials about current “market conditions” as Germany pushes it to accept a bailout and help reverse a bond selloff across the euro-region’s periphery. ‘Ongoing Contacts’ “Ongoing contacts continue at official level with international colleagues in light of current market conditions,” a Irish Finance Ministry spokesman said in an email late yesterday. “Ireland has made no application for external support” and the government is “fully funded till well into 2011,” the spokesman said. The euro slid 0.2 percent to $1.3666, after falling 2.4 percent last week, the most in three months. U.S. retail sales rose 0.7 percent in October from the month before, the fourth increase in a row, based on the median estimate of 67 economists surveyed by Bloomberg News before today’s Commerce Department report. Other figures this week will show inflation is contained, surveys show. “At some point in the not-too-distant future, we are likely to face an economy growing in a self-sustaining way while the unemployment rate is still relatively high by historical standards,” Lacker said yesterday in a speech in Richmond, Virginia. “Inflation recently has been quite low.” Fed Purchases The central bank is scheduled to buy $7 billion to $9 billion of Treasuries maturing from May 2016 to November 2017 today, according to its website. The Fed said on Nov. 3 that it would purchase an additional $600 billion of government securities through June, expanding record stimulus to try to reduce unemployment from 9.6 percent and prevent deflation. Fed chairman Ben S. Bernanke is trying to boost growth after near-zero interest rates and $1.7 trillion in securities purchases helped pull the economy out of recession without bringing down joblessness that is close to a 26-year high. Two-year yields, among those most sensitive to what the Fed does with its benchmark rate, have climbed to 0.53 percent from a record low of 0.31 percent on Nov. 4. The rate was 28 basis points more than the upper end of the Fed’s target range for overnight loans between banks, the most in two months. Inflation Bets Bernanke’s plan to spark inflation in the U.S. is already showing signs of succeeding, the market for bond options indicates. Investors are paying eight times more than in April for options on interest-rate swaps that protect against rising yields relative to those that bet on them falling, according to Barclays Plc data. Bonds that compensate for higher consumer prices also show heightened inflation expectations. While a quarterly Bloomberg Global Poll last week of 1,030 investors, analysts and traders who are Bloomberg subscribers showed that 56 percent said the plan won’t boost growth, half said it will help avoid deflation. That may be more important to Bernanke because a general decline in prices makes consumers and businesses less willing to invest. Fund managers in a survey by Ried Thunberg ICAP Inc., a unit of the world’s largest inter-dealer broker, became more bearish on the outlook for U.S. bonds through the end of December. Ried’s sentiment index declined to 46 for the seven days ended Nov. 12 from 47 the week before. A figure less than 50 indicates that investors expect prices to fall. To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net. To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net.

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