Treasury traders increased bets on inflation to the most in 32 months after oil prices surged and as economists said an industry report today will show optimism among small business climbed in February. The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the securities, widened to 2.55 percentage points, the most since July 2008. The government is scheduled to sell $32 billion of three-year notes today. “Bond investors should buy TIPS,” said Hiroki Shimazu, an economist in Tokyo at Nikko Cordial Securities Inc., a unit of Sumitomo Mitsui Financial Group Inc., Japan’s third-largest publicly traded bank by assets. “Fear of inflation will rise.” Ten-year yields were little changed at 3.52 percent as of 6:01 a.m. in London, according to BGCantor Market Data. The 3.625 percent note maturing in February 2021 traded at 100 7/8. The rate will advance to 3.7 percent by year-end, Shimazu said. A Bloomberg survey of banks and securities companies predicts 3.93 percent. Treasuries have handed investors a 0.4 percent loss this year, after falling 2.7 percent in the fourth quarter of 2010, based on Bank of America Merrill Lynch indexes. The National Federation of Independent Business monthly optimism index climbed to a three-year high of 95 last month from 94.1 in January, based on the median forecast in a Bloomberg News survey of economists. ‘Price Pressures’ Crude oil for April delivery rose to $106.95 a barrel yesterday, the most since September 2008, as Libyan government warplanes bombed rebel positions near the oil hub of Ras Lanuf. The increase in oil costs has caused a “slight lifting of price pressures” in the U.S., Federal Reserve Bank of Dallas President Richard Fisher said yesterday in Washington. German two-year yields climbed to 1.84 percent on March 4, the highest in 26 months, after European Central Bank President Jean-Claude Trichet said March 3 that he may increase interest rates at the April 7 policy meeting to contain inflation. The extra yield German two-year notes offer over similar- maturity Treasuries was 1.05 percentage points after expanding to 1.08 percentage points on March 4, the most since 2008. U.S. employment, housing and municipal budgets are the weak spots in the economy, said Kei Katayama, leader of the foreign fixed-income group in Tokyo at Daiwa SB Investments Ltd., which has the equivalent of $55.3 billion in assets. Yields can fall if the inflation threat from higher oil prices recedes, he said. Jobless Rate Japanese drugmaker Eisai Co. said today it plans to fire 20 percent of its U.S. workforce, or about 600 people. The U.S. jobless rate declined to 8.9 percent in February from 9 percent in January, the Labor Department reported March 4. U.S. residential real-estate prices dropped by the most in a year in the 12 months ended in December, based on the S&P/Case-Shiller index of home values. California Governor Jerry Brown has proposed a realignment of government services to close a budget gap of $17.2 billion for the year that starts July 1. “The economy will slow down,” Katayama said. “If the market focuses on the economic outlook, yields will go down.” He said he bought U.S. government debt earlier this year. The Fed is scheduled to buy $6 billion to $8 billion of Treasuries maturing from September 2016 to February 2018 today as part of its plan to sustain the expansion by pumping $600 billion into the economy. Three-Year Sale The three-year notes scheduled for sale today yielded 1.27 percent in pre-auction trading, compared with 1.349 percent at the previous sale of the securities on Feb. 8. Investors bid for 3.01 times the amount of available debt last month. The average for the past 10 auctions is 3.14. Indirect bidders, which include foreign central banks, bought 27.6 percent, compared with the 10-sale average of 38.8 percent. Direct bidders, non-primary dealers buying for their own accounts, purchased 10.1 percent, the least in a year. The 20 primary dealers are firms that are required to underwrite the U.S. debt. The Treasury is also scheduled to sell $21 billion of 10- year notes tomorrow and $13 billion of 30-year bonds on March 10. 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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