Treasury 10-year notes headed for a second weekly loss before data forecast to show industrial output rose and new home construction held near the most in four years, damping demand for the safety of U.S. government debt. Yields on the benchmark notes fell from a five-week high today as investors awaited a report that economists said will show inflation is in check even as the Federal Reserve is set to start a new program of asset purchases designed to boost the economy. The U.S. plans to sell another $113 billion in government debt auctions next week. “The current unstable market environment bodes badly for auctions next week,� said Hiroki Shimazu, an economist at SMBC Nikko Securities Inc. in Tokyo, a unit of Japan’s second-largest financial group by market value. “The U.S. housing market is recovering much faster than many people expected.� The yield on the benchmark 10-year note was little changed at 1.73 percent at 9:19 a.m. London time, after rising to 1.75 percent, the most since Nov. 7. The 1.625 percent security due November 2022 traded at 99 1/32. The rate has climbed 11 basis points since Dec. 7. Next week, the U.S. government will sell $35 billion in two-year notes, an equal amount of five-year securities, $29 billion in seven-year debt and $14 billion in five-year Treasury Inflation Protected Securities. The auctions will be on four consecutive days beginning Dec. 17. Sale Demand A $13 billion sale of 30-year debt yesterday drew bids for 2.5 times the amount on offer, down from 2.77 times at the previous auctions on Nov. 8. Industrial production increased 0.3 percent in November from October, according to the median estimate of 81 economists in a Bloomberg News survey. That would be the biggest gain in four months. The Commerce Department will say on Dec. 19 that housing starts maintained an 871,000 annual rate last month, economists forecast. They climbed to 894,000 in October, the most since July 2008. The Federal Open Market Committee said on Dec. 12 that the central bank will buy $45 billion of Treasuries a month from next year. The policy-setting committee also said interest rates will remain near zero “at least as long as� the jobless rate stays above 6.5 percent and if inflation “between one and two years ahead� is no more than 2.5 percent. Inflation Outlook The latest move from the Fed will follow the expiration at year-end of Operation Twist, a $667 billion program in which the central bank has sold about $45 billion in short-term Treasuries each month to buy an equal amount of long-term debt. Bill Gross, manager of the world’s biggest bond fund at Pacific Investment Management Co., said the Fed’s latest round of monetary stimulus will allow the Treasury to issue debt for no cost. “There are complications� of such an arrangement, Gross, who runs the $285 billion Total Return Fund, said yesterday in an interview on Bloomberg Television. “Inflation is one of the complications.� The U.S. consumer price index is estimated to have risen 1.9 percent in November from a year earlier, down from a six- month high of 2.2 percent in October, according to a separate Bloomberg poll taken before today’s data. “People are talking about inflation fears, but inflation expectations will calm down,� said Hideo Shimomura, who helps oversee the equivalent of $71.7 billion in Tokyo as chief fund investor at Mitsubishi UFJ Asset Management Co., a unit of Japan’s largest publicly-traded bank. “The new measures are more flexible. They can stop the stimulus once they see unemployment go down,� he said, referring to the central bank’s latest plan to buy Treasuries. Shimomura recommended selling medium-term notes and buying longer-maturity debt and said he’s considering making that trade in coming days. To contact the reporter on this story: Lucy Meakin in London at lmeakin1@bloomberg.net; Masaki Kondo in Singapore at mkondo3@bloomberg.net To contact the editor responsible for this story: Paul Dobson at pdobson2@bloomberg.net.

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