Treasuries fell for the first time in three days on speculation the U.S. government will increase borrowing as President Barack Obama pushes his stimulus package through Congress. Ten- and 30-year bonds led the declines after the U.S. Treasury said yesterday it will borrow $493 billion this quarter, 34 percent more than initially projected. The U.S. will probably say tomorrow it plans to sell $69 billion in three auctions next week, according to Wrightson ICAP LLC. Stocks rose in Asia and Europe, eroding demand for the safest assets. “Obama’s fiscal program seems to be increasing by the minute and the markets are expecting the worst-case scenario in terms of issuance,” said Orlando Green, a fixed-income strategist in London at Calyon, Credit Agricole SA’s investment- banking arm. “It’s going to be tough to digest all that issuance and it’s tenuous for the Treasury market.” The yield on the 10-year note increased three basis points to 2.75 percent as of 7:34 a.m. in New York, according to BGCantor Market Data. The price of the 3.75 percent security due in November 2018 fell 9/32, or $2.81 per $1,000 face amount, to 108 15/32. A basis point is 0.01 percentage point. Ten-year yields, which set a record low of 2.04 percent on Dec. 18, averaged 4.56 percent this decade. They will trade at 2.5 percent by the end of March, Green said. The MSCI World Index of shares rose 0.3 percent, snapping a three-day loss. The Dow Jones Stoxx 600 Index of European shares increased 0.4 percent. U.S. stock futures also advanced. ‘Underweight Treasuries’ The U.S. is increasing its debt sales to finance a growing budget deficit and programs to spur the economy. Obama said yesterday that lawmakers shouldn’t let “very modest differences” over tax cuts and spending stand in the way of enacting a stimulus plan that may cost almost $900 billion. Treasuries will draw demand as the U.S. economy shrinks, though corporate debt will be a better bet later in 2009 as the recession ends, said Jay Mueller, a bond investor at Wells Fargo Capital Management in Milwaukee and who manages about $3 billion of debt. “We’re still a few months from the inflection point where it really makes sense to underweight Treasuries in a big way and go into the spread product,” Mueller said yesterday on Bloomberg Television. Credit Revival The government will probably say tomorrow that it plans to sell $32 billion in three-year notes, $22 billion in 10-year debt and $15 billion in 30-year bonds next week, all records, according to Wrightson. The company, based in Jersey City, New Jersey, specializes in government finance. Treasuries fell 3.1 percent in January, the biggest monthly decline in almost five years, according to Merrill Lynch & Co.’s U.S. Treasury Master index. Corporate bonds returned 1.2 percent, another Merrill index showed, as credit markets that froze last year attracted investors. Yields suggest credit markets are reviving after freezing last year, though at a slower pace than in the final months of 2008. Contracts on the Markit iTraxx Crossover Index of 50 European companies with mostly high-risk, high-yield credit ratings dropped 10 basis points to 1,100, according to JPMorgan Chase & Co. prices at 7:43 a.m. in London. Credit-default swaps, contracts to protect against or speculate on default, pay the buyer face value if a company fails to adhere to its debt agreements. ‘Upward Pressure’ “The economy will recover in the second half of this year” in the U.S., said Yasutoshi Nagai, chief economist in Tokyo at Daiwa Securities SMBC Co., part of Japan’s second- largest brokerage. “That will put upward pressure on Treasury yields. Corporate bonds will perform well.” Anything less than 3 percent in 10-year yields is “too expensive,” said Nagai, who correctly predicted U.S. company bonds would outperform government debt last month. The TED spread, which measures the difference between what banks and the U.S. government pay for three-month loans, was at 97 basis points today, from 95 basis points on Jan. 29, its lowest level since August. It tumbled from 464 basis points in October, after the collapse of Lehman Brothers Holdings Inc. in the previous month. The London interbank offered rate, or Libor, for three- month dollar loans, was little changed at 1.23 percent today. It was as low as 1.08 percent on Jan. 14, versus an average of 3.72 percent for the past five years. Near Zero The Fed’s decision to keep its target rate near zero hasn’t succeeded in reducing consumer lending rates to levels from before the credit market rout. The difference between 30-year mortgage rates and 10-year Treasury yields is about 2.26 percentage points, up from 1.55 percentage points five years ago. “The gap between zero and the appropriate fed funds rate is considerable -- it should be around minus 6 percent,” Jan Hatzius, chief U.S. economist at Goldman Sachs Group Inc. said today at a conference in London. “The Fed will move to purchase Treasuries before too long. They are going to try to support private-asset markets for the next couple of years.” The market for securities with characteristics of both debt and equity that Citigroup Inc., Bank of America Corp. and other financial companies used to bolster their capital is in freefall on concern governments will stop banks that took public cash from paying interest. The hybrids, which typically count as regulatory capital to cushion against losses, fell 11 percent last month in the U.S., more than they did in all of 2008, according to Merrill’s indexes. Citigroup and Bank of America bonds lost as much as 34 percent of their value. “The danger is the government’s going to take over everything and not pay anything,” said Gregory Habeeb, who manages $7.5 billion in fixed-income securities at Calvert Asset Management Co. in Bethesda, Maryland. “It could happen.”

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