Ten-year Treasuries fell the most in almost two weeks as stocks gained on government efforts to bail out banks, reducing the haven appeal of U.S. debt. The decline drove yields about a quarter-percentage point higher than the record low set last month after the U.S. agreed to a $138 billion bailout of Bank of America Corp. The cost of living fell in December as the recession deepened. “It brings into question the solvency of the banking system,” said Charles Comiskey, head of U.S. Treasury trading in New York at HSBC Securities USA Inc. The 10-year yield rose 16 basis points, or 0.16 percentage point, to 2.36 percent at 8:44 a.m. in New York, according to BGCantor Market Data. The price of the 3.75 percent security maturing in November 2018 fell 1 15/32, or $14.69 per $1,000 face amount, to 112 5/32. Two-year note yields increased seven basis points to 0.77 percent. The yield on the 10-year note may fall below 2 percent in the next four weeks, according to Maraffino. “The Bank of America bailout has stimulated demand for risky assets, and so Treasuries are being sold off,” said Giuseppe Maraffino, a bond strategist in Milan at UniCredit Markets & Investment Banking, a unit of Italy’s largest bank. “This trend will remain in place in the near term.” Treasury notes headed for a weekly gain after the Commerce Department on Jan. 14 said U.S. retail sales fell for a sixth straight month in December, feeding demand for the relative safety of government debt as the economy shrinks. Consumer Price Index Americans paid 0.1 percent more for goods and services in 2008, the smallest annual gain in a half century, the Labor Department reported today in Washington. Consumer prices fell 0.7 percent in December after dropping 1.7 percent the prior month. Excluding food and energy, costs were unchanged. The U.S. government agreed to invest $20 billion more in Bank of America and guarantee $118 billion of assets “as part of its commitment to support financial-market stability,” the Treasury Department, Federal Reserve and Federal Deposit Insurance Corp. said in a joint statement shortly after midnight in Washington. The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, narrowed to 0.98 percentage point from 2008’s high of 4.64 percentage points in October. McDonald’s Corp., the world’s largest restaurant company, and Wal-Mart Stores Inc., the biggest discount chain, both sold bonds this week. Bond markets in the Asia-Pacific region are having their busiest January for at least a decade, with $32.3 billion in sales. Yield Outlook The decline in Treasuries will increase in the second half of 2009 as efforts to end the U.S. recession take hold and the demand for safety abates, according to 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. Mitsubishi UFJ Asset Management Co., part of Japan’s largest bank, said yields will rise in the second half because of increased government borrowing, according to Chief Fund Manager Hideo Shimomura. The $825 billion economic plan unveiled yesterday by House Democrats and being assembled with President-elect Barack 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. Senate Vote 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. “We’re not in Treasuries,” said Goetti. “If you have $2 trillion deficits, and it might be even more, there will be a lot of supply.” Bond bulls say the deepening recession means Treasuries will gain. “U.S. consumer spending is slowing. The risk of deflation is rising,” said Hiromasa Nakamura, senior investor in Tokyo at Mizuho Asset Management Co., which has $44.4 billion in assets. “Yields will decline.” Ten-year yields may fall below 2 percent this month, he said, surpassing the record of 2.04 percent set Dec. 18. Holiday Shopping 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. Treasuries surged after the last consumer-price report on Dec. 16 showed the index fell by 1.7 percent in November, the most ever. The Federal Reserve cut its target for overnight loans between banks the same day to a range of zero percent to 0.25 percent, from 1 percent, to battle the recession. 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 50 basis points from 2.45 percentage points six months ago. The 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.

Source