U.S. Treasuries fell, heading for their biggest monthly loss in almost five years as the government prepared for a second record note sale this week and the U.S. House passed President Barack Obama’s economic plan. Today’s $30 billion five-year note sale follows a $40 billion two-year auction on Jan. 27 as Obama planned to increase borrowing to unprecedented levels to end the U.S. recession. The Federal Reserve signaled yesterday it’s moving closer to buying long-term Treasuries to keep borrowing costs low. “Higher yields are driven primarily by supply indigestion and improvement in risk appetite at the start of the year, which damped demand for safe-haven bids,” said Richard McGuire, fixed-income strategist at Royal Bank of Canada in London. “Near-term, the market may push bond yields higher to test the resolve of the Fed.” The yield on the benchmark 10-year note rose three basis points, or 0.03 percentage point, to 2.69 percent at 7:23 a.m. in New York, according to BGCantor Market Data. That’s the highest level since Dec. 12. The price of the 3.75 percent security due in November 2018 fell 1/4, or $2.50 per $1,000 face amount, to 109 1/32. Five-year note yields increased two basis points to 1.72 percent, climbing from 1.539 percent, the high yield of the securities at the Dec. 23 auction. Investors bid for 2.06 times the amount of debt on offer at that sale. The average for the past 10 auctions is 2.12. Government bonds dropped 2.3 percent in January, according to Merrill Lynch & Co.’s U.S. Treasury Master index, the steepest decline since April 2004. Record U.S. Borrowing The U.S. will probably borrow a record $2.5 trillion this fiscal year ending Sept. 30, versus $892 billion in notes and bonds sold in the prior 12 months, according to Goldman Sachs Group Inc., one of the 17 primary dealers that underwrite the sale of government debt. MSCI’s Asia Pacific Index of regional shares rose 1.2 percent, fueling demand for higher-yielding assets. Bond risk declined, credit-default swaps showed. Western Asset Management, the Pasadena, California-based investor with $586 billion in fixed-income assets, recommended corporate bonds in a statement today. U.S. company debt returned 1.6 percent in January as Treasuries declined, Merrill Lynch indexes show. Conair Corp. Treasurer John Vele moved two-thirds of the hair-care appliance maker’s excess cash to money-market funds from government bonds this month to boost his annual return to 1.5 percent from 1.25 percent. ‘Pick Up Yield’ “If we can pick up yield, well, thank God,” Vele said from his office in Stamford, Connecticut. The “panic mentality” that sparked a flight to U.S. Treasuries after Lehman Brothers Holdings Inc. went bankrupt in September has given way to a “cautious” willingness to return to company debt, said Edward E. Liebert, chairman of the National Association of Corporate Treasurers, based in Reston, Virginia. Treasuries tumbled yesterday after the Fed failed to provide a timetable for buying government debt as a way to reduce borrowing costs. The declines are eroding 2008’s 14 percent gain, which was driven by investors seeking the relative safety of bonds to protect them from a shrinking economy. Two-year yields at 0.91 percentage point were still within 31 basis points of their record low because of slowing economic growth around the world. The U.S. gross domestic product won’t grow again until the second half of 2009, a Bloomberg News survey of banks and securities companies showed. Consumer Inflation The real yield, what investors get from 10-year notes after inflation, was 2.57 percent, near the highest in 16 months. Consumer prices increased 0.1 percent in 2008, after rising 4.1 percent the previous year. Deflation is a general drop in prices for goods and services. The difference between rates on 10-year notes and Treasury Inflation Protected Securities, which reflects the outlook among traders for consumer prices, widened as the U.S. House passed Obama’s $819 billion economic stimulus passage. The spread increased to 88 basis points from nine basis points at the end of last year. The U.S. recession brought the figure down from 2.34 percentage points six months ago. Separate U.S. government figures today are forecast by economists surveyed by Bloomberg to show new home sales fell to the lowest level since 1982. “Data coming through remained very soft, and that macro backdrop is something that is not going away soon,” said Sean Maloney, fixed-income strategist at Nomura International Plc. Mortgage Rates Thirty-year fixed home-loan rates were about 5.12 percent in the U.S. last week, according to mortgage-finance company Freddie Mac in McLean, Virginia. The figure was 2.5 percentage points more than 10-year Treasury yields, versus an average spread of about 1.8 percentage points over five years. Policy makers must stop declines in asset prices to revive the U.S. economy in 2010 and curb rising unemployment, according to Bill Gross, co-chief investment officer of Pacific Investment Management Co., the world’s biggest bond fund. “You can’t bail out everyone, yet economic recovery is not possible unless certain critical asset sectors are not only reliquefied but rejuvenated in price,” Gross wrote in his February investment outlook posted today on the firm’s Web site.

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