Treasuries gained, with two-year note yields falling the most in two weeks, as a report showed U.S. builders broke ground in December on the fewest houses since 1959. Yields also declined as another report showed initial claims for jobless benefits last week matched a 26-year high. President Barack Obama’s economic team worked to complete a bank-rescue plan that can be implemented along with an $825 billion stimulus package being negotiated with Congress, people familiar with the deliberations said. “I wouldn’t be surprised to see some buying; the economy is still weak,” said Brian Edmonds, head of interest rates at Cantor Fitzgerald LP in New York, one of the 17 primary dealers that trade with the Federal Reserve. “I don’t think there is a danger of the economy going gangbusters from here and derailing fixed income.” The two-year note’s yield dropped seven basis points, or 0.07 percentage point, the most since Jan. 9, to 0.73 percent at 8:50 a.m. in New York, according to BGCantor Market Data. The price of the 0.875 percent security due in December 2010 rose 1/8, or $1.25 per $1,000 face amount, to 100 9/32. The 10-year note’s yield decreased four basis points to 2.51 percent. Housing starts fell 16 percent last month to an annual rate of 550,000 that was less than forecast and the lowest since the government started compiling statistics almost 50 years ago, a Commerce Department report showed. Initial jobless claims increased by 62,000 to 589,000, more than forecast, in the week ended Jan. 17, from a revised 527,000 the prior week, according to a Labor Department report. Debt Auctions The Treasury is scheduled to announce today the size of two- and five-year notes and 20-year Treasury Inflation Protected Securities, or TIPS, it plans to sell next week. The difference between rates on 10-year conventional notes and TIPS, reflecting the outlook among traders for consumer prices, widened to 59 basis points from nine basis points at the end of last year. It’s still below the average of 1.78 percentage points for the past year. Some parts of the credit markets indicate government efforts to spur growth, including a $700 billion plan approved by former President George W. Bush, are starting to work. The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, narrowed to 1.05 percentage points from 2008’s high of 4.64 percentage points in October. The London interbank offered rate, or Libor, for three-month dollar loans was 1.16 percent today, down from 4.82 percent in October. Credit Risk Bank bailout plans in the U.S. and the U.K. are leading investors to buy contracts that provide insurance on the debt of the two nations, said Hideo Shimomura, chief fund investor at Mitsubishi UFJ Asset Management Co. in Tokyo. Credit-default swaps covering five-year U.S. securities climbed to 60 basis points, the highest level since Bloomberg started tracking the data. That means an investor would need to pay a record $60,000 to protect $10 million of debt. For the U.K., the contract rose to 1.47 percentage points, the most ever, from 1.07 percentage points at the start of the year, according to data compiled by Bloomberg. Credit-default swaps, which protect against or speculate on default, pay the buyer face value if a company fails to adhere to its debt agreements. “The government’s credit risk is rising” in the two nations, said Shimomura, who oversees $4 billion in non-yen bonds at the unit of Japan’s largest bank. “The deficit situation is becoming worse.” Economists at Goldman Sachs Group Inc. in New York, one of the 17 primary dealers required to bid in Treasury auctions, predict U.S. borrowing will rise to a record $2 trillion this fiscal year ending Sept. 30, compared with $892 billion in notes and bonds sold during the last fiscal year. Treasuries underperformed European debt. They handed investors a loss of 1.50 percent this year compared with a loss of 0.15 percent from German bonds, according to Merrill Lynch & Co.’s Treasury Master and German Federal Government indexes.

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