Treasury breakeven rates showed inflation expectations are approaching the highest level in a month before Federal Reserve policy makers meet today to discuss measures to support U.S. economic growth. The benchmark 10-year note held gains from yesterday as dealers that trade with the Fed predict the central bank will announce a plan to buy as much as $45 billion of government debt a month. Economists say a report in two days will show U.S. retail sales rose in November. The Treasury will auction $32 billion of three-year notes today. “Improvement in the U.S. economy as well as expectations for more monetary easing are contributing to the gain in the breakeven rate,� said Hitoshi Asaoka, a senior strategist at Mizuho Trust & Banking Co. in Tokyo. “Markets are already focused on what maturities the Fed will decide to buy.� The difference between yields on 10-year notes and Treasury Inflation Protected Securities was at 2.49 percentage points at 8:21 a.m. London time. The spread, which measures investor expectations for inflation, widened to 2.51 percentage points on Dec. 7, the most since Nov. 7. The 10-year yield was little changed at 1.61 percent, according to Bloomberg Bond Trader prices. The 1.625 percent note due in November 2022 was 100 3/32. The yield declined to a record 1.38 percent on July 25. Fed Policy Primary dealers forecast the Fed will decide at this week’s two-day meeting to buy Treasuries and keep benchmark interest rates near zero into 2015, Bloomberg surveys showed. Chairman Ben S. Bernanke unveiled a plan in September to buy $40 billion of mortgage debt each month. “If the Fed introduces open-end buying of Treasuries, it would significantly decrease any upward pressure for yields,� Mizuho’s Asaoka said. A program known as Operation Twist, in which the Fed sells shorter-maturity Treasuries and buys longer-dated debt, is due to expire this year. As part of the plan, the central bank will today purchase as much as $1.5 billion of inflation-linked securities maturing from January 2019 to February 2042. The most likely scenario for additional fund provision “is for the Fed simply to suspend the front-end sales and keep the existing Twist purchases unchanged in size and maturity sectors,� Deutsche Bank AG analysts, including Dominic Konstam, head of interest-rate strategy in New York, wrote in a research note on Dec. 7. “In this case, Treasuries would rally.� Retail Sales U.S. retail sales increased 0.5 percent last month after falling 0.3 percent in October, according to the median estimate of 79 economists in a Bloomberg survey before the Commerce Department releases the figures on Dec. 13. The three-year notes to be sold today yielded 0.32 percent in pre-auction trading, compared with a yield of 0.392 percent at the previous sale on Nov. 6. Investors bid for 3.41 times the amount of debt available last month, down from 3.96 times on Oc. 9. Primary dealers bought 52.7 percent of the securities, the most in three months. The Treasury is also scheduled to auction $21 billion of 10-year notes tomorrow and $13 billion of 30-year securities on Dec. 13. To contact the reporter on this story: Masaki Kondo in Singapore at mkondo3@bloomberg.net; Lucy Meakin in London at lmeakin1@bloomberg.net To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net

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