Treasuries fell as stocks gained and traders speculated the U.S. will announce plans to sell $60 billion of notes and bonds next week after the worst two-month losses in government debt in five years. The 10-year yield rose the most in a week as the cost of protecting against losses on Treasuries climbed, indicating increased concern supply is overwhelming demand. Kyle Bass, the hedge-fund manager who made $500 million in 2007 betting on a decline on subprime mortgages, said government borrowing around the world is creating a “potential inflationary time bomb.” “Concerns about supply and the credit worthiness of the U.S. are driving the market,” said Peter Mueller, a Frankfurt- based fixed-income strategist at Commerzbank AG, Germany’s second-largest lender. “The economic situation means the budget deficit will explode further.” The yield on the 10-year note rose eight basis points, or 0.08 percentage point, to 2.96 percent at 7:49 a.m. in New York, according to BGCantor Market Data. The price of the 2.75 percent security due in February 2019 dropped 5/8, or $6.25 per $1,000 face amount, to 98 6/32. Ten-year yields may rise to 3.1 percent before dropping to 2.5 percent over the next six months, Mueller said. Yields fell to a record 2.04 percent on Dec. 18. Steepest Loss The U.S. will probably announce tomorrow that it will sell $33 billion of three-year notes on March 10, $17 billion of 10- year debt the following day and $10 billion of 30-year bonds on March 12, according to Wrightson ICAP LLC, a research unit of the world’s largest inter-dealer broker. The auctions follow $94 billion of note sales last week. Treasuries handed investors a loss of 3.6 percent in the first two months of 2009, the steepest decline since dropping 4.8 percent between May and the end of July 2003, according to Merrill Lynch & Co.’s U.S. Treasury Master index. German bonds earned investors 0.2 percent in the two months through February, according to Merrill’s German Federal Governments index. The yield on the benchmark 10-year yield rose from 2.21 percent at the end of 2008 even as the MSCI World index fell 23 percent. Five-year credit-default swaps on U.S. government debt, which protect investors in the case of a default, increased one basis point to 94.35, the highest since Feb. 25, according to CMA Datavision prices. Seeking Approval Federal Reserve Chairman Ben S. Bernanke and Treasury Secretary Timothy Geithner said yesterday policy makers may increase aid to the banking system beyond the $700 billion already approved even at the cost of soaring fiscal deficits. President Barack Obama’s administration is seeking congressional approval for a budget of $3.55 trillion for the fiscal year beginning in October. Confidence in government and central bank leadership is plummeting globally, sending investors to buy “old-fashioned stores of value” such as precious metals, wrote Bass, managing partner of Dallas-based Hayman Advisors LP, in a letter to clients this week. The difference between rates on 10-year notes and Treasury Inflation Protected Securities, or TIPS, which reflects the outlook among traders for consumer prices climbed to 95 basis points from 9 basis points on Dec. 31. Consumer prices were unchanged in the 12 months ended Jan. 31, the Labor Department said Feb. 20, which shows bond investors aren’t losing anything to inflation. Investors are already demanding more to hold the government’s long-term debt. Yield Spread The difference between two- and 10-year yields widened five basis points to 2.03 percentage points, after earlier reaching the most since November. It was as low as 1.25 percentage points late last year. An indicator some investors use to identify targets indicates the Treasury market sell-off may pause. The Fibonacci series of numbers indicates 10-year yields need to hold above 3.07 percent if they are to rise further, according to data compiled by Bloomberg. Yields approached that level twice in February and failed to break through each time. The figure is a 50 percent retracement of the decrease in yield from 4.1 percent on Oct. 15 to the record low of 2.04 percent on Dec. 18. A move past one target in the series indicates the rate may fall or rise to another level. A Bloomberg survey of banks and securities companies projects 10-year yields will fall to 2.64 percent by June 30. Credit Markets Yields indicate the government and central bank have yet to restore credit markets to where they were before a rout that began in 2007 and worsened last year. The difference between what banks and the Treasury pay to borrow for three months, the so-called TED spread, narrowed to 1.01 percentage points from 4.64 percentage points in October. The gap averaged 0.27 percentage point from 2002 through 2006. The London interbank offered rate, or Libor, for three- month dollar loans, rose to 1.28 percent from 1.08 percent on Jan. 14. Average 30-year fixed mortgage rates climbed to 5.07 percent in the seven days ended Feb. 26 from 4.96 percent in the middle of January, according to loan-finance company Freddie Mac. Rates are more than 2 percentage points higher than 10-year Treasury yields. To contact the reporters on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net

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