Treasuries dropped, with 10-year notes ending a six-day rally, after U.S. lawmakers unveiled a $825 billion plan to snap the recession and Asian stocks rose. Benchmark securities fell the most in almost two weeks on speculation President-elect Barack Obama will increase borrowing to record levels to pay for the stimulus package. The proposal would add to a budget deficit that the Congressional Budget Office says will more than double this year to $1.18 trillion. “We’re not in Treasuries,” said Hans Goetti, who oversees $10 billion in Asia as chief investment officer at LGT Bank in Liechtenstein (Singapore) Ltd., part of the bank for the wealthy owned by Liechtenstein’s royal family. “If you have $2 trillion deficits, and it might be even more, there will be a lot of supply.” The 10-year yield rose three basis points to 2.23 percent as of 12:21 p.m. in Tokyo, according to BGCantor Market Data. The price of the 3.75 percent security maturing in November 2018 fell 10/32, or $3.13 per $1,000 face amount, to 113 10/32. A basis point is 0.01 percentage point. Two-year yields increased six basis points to 0.75 percent. The MSCI Asia Pacific Index of regional shares rose 1 percent, gaining for a second time in three days. It may take six to 12 months for the decline in Treasuries to gather strength because there is still a demand for the safest assets while the biggest economies shrink, Goetti said. Higher Borrowing Mitsubishi UFJ Asset Management Co., part of Japan’s largest bank, is taking the same view for 2009. A nine-year Treasuries rally may last through the first half of 2009 because of deflation in the economy, Chief Fund Manager Hideo Shimomura said. Deflation, a general drop in prices for goods and services, enhances the value of the fixed payments from bonds. Treasuries will slide in the second half as borrowing increases, he said. The economic plan in Congress, being assembled with Obama’s transition team, comes after the U.S. budget deficit soared to a record $485.2 billion in the first three months of the fiscal year that started Oct. 1. For all of 2008, the shortfall was $454.8 billion. The U.S. Senate voted yesterday to release $350 billion in financial-rescue funds, the second half of the $700 billion in the Troubled Asset Relief Program enacted last year. Government borrowing pushed U.S. marketable debt to a record $5.82 trillion in November, from $4.54 trillion at the end of 2007. Bond Bulls Economic figures and reports from companies indicate the U.S. recession is deepening. The nation lost 2.589 million jobs in 2008, more than in any year since 1945. The worst holiday shopping season in at least four decades is forcing retailers such as J.Crew Group Inc. to cut prices. Toyota Motor Corp., which posted its biggest decline in U.S. sales in more than three decades last year, plans to cut North American vehicle production further in 2009. Bond bulls say falling prices in the economy mean the Treasuries rally has further to go. “Yields will decline,” said Hiromasa Nakamura, senior investor in Tokyo at Mizuho Asset Management Co., which has $44.4 billion in assets. “U.S. consumer spending is slowing. The risk of deflation is rising.” Ten-year yields may fall below 2 percent this month, he said, surpassing the record of 2.04 percent set Dec. 18. The difference between rates on 10-year Treasury Inflation Protected Securities and conventional notes, which reflects the outlook among traders for consumer prices, narrowed to 49 basis points from 2.45 percentage points six months ago. Costs Drop The cost of living dropped 0.2 percent for all of 2008, the first annual decline since 1954, according to the median estimate in a Bloomberg News survey of economists before the Labor Department issues the figure today. Consumer prices probably dropped 0.9 percent in December, a third straight drop, the survey showed. The report is scheduled for 8:30 a.m. in Washington. Bond bulls are in the minority. A Bloomberg survey of banks and securities companies projects the 10-year yield will rise to 3.07 percent and two-year rates will increase to 1.44 percent by the end of the year, with the most recent forecasts given the heaviest weightings. Yields suggest efforts to revive credit markets that froze last year are working. The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, narrowed to 0.99 percentage point from 2008’s high of 4.64 percentage points in October. The three-month London interbank offered rate for loans in dollars was 1.09 percent as of yesterday. It slid to 1.08 percent the day before, a level not seen since 2003. Net purchases of U.S. long-term bonds, notes and stocks by investors from outside the nation probably rose to $15 billion in November from $1.5 billion the month before, based on a Bloomberg survey of economists. The monthly average since the start of 2007 is $61.1 billion. The Treasury Department report is scheduled for 9 a.m. in Washington.

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