Treasuries fell for a fourth day, the longest decline this month, as rising stocks and the easing risk of corporate defaults cut demand for government debt and the U.S. prepared to sell a record $98 billion of notes. Government securities declined 1.8 percent so far in 2009, heading for the worst start to a year since 1996, according to Merrill Lynch & Co.’s U.S. Treasury Master Index. Bonds are tumbling as President Barack Obama’s administration borrows unprecedented amounts to try to spur the shrinking economy, with a $40 billion two-year sale scheduled for today. “Risk appetite appears to have legs and that may put government bonds on the defensive in the near term,” said Padhraic Garvey, head of investment-grade debt strategy at ING Groep NV in Amsterdam. “We have to see if the U.S. plan is well executed. We still have a number of difficult months ahead, but right now there is a good opportunity to position for narrower corporate spreads.” The 10-year note yield rose three basis points to 2.68 percent as of 6 a.m. in New York, according to BGCantor Market Data. The price of the 2.75 percent security due in February 2019 dropped 8/2, or $2.50 per $1,000 face amount, to 100 18/32. A basis point is 0.01 percentage point. The yield, which fell to a record low of 2.04 percent on Dec. 18, averaged 4.26 percent for the past decade. A Bloomberg survey of banks and securities companies projects the yield will be 2.76 percent by June 30, with the most recent forecasts given the heaviest weightings. A separate Bloomberg survey shows the U.S. economy will shrink in the first half of the year and expand in the second. Obama’s Plans Obama’s plans to revive the shrinking U.S. economy will send inflation and yields higher in the years ahead, said Daniel Fuss, who oversees $40 billion at Loomis Sayles & Co. in Boston. Treasury yields will be double today’s levels within five years, Fuss said yesterday in a Bloomberg Television interview. The Federal Reserve will be reluctant to raise interest rates as it seeks to protect the economy, he said. “The real pressures will come in a few years on the central bank as the rate of inflation starts to build,” Fuss said. “We don’t think the central bank will feel free to lean against the markets and the economy.” The difference between rates on 10-year notes and Treasury Inflation Protected Securities, which reflects the outlook among traders for consumer prices, climbed to 1.32 percentage points, approaching a six-week high. The average for the past five years is 2.27 percentage points. The consumer price index rose 0.2 percent in the 12 months ended Feb. 28, meaning 10-year notes yield 2.48 percent after inflation is taken into account. The so-called real yield is more than double the five-year average. Two-Year Auction Two-year yields were little changed at 0.9 percent before today’s government auction. The yield dropped from 0.961 at the previous sale on Feb. 24. Investors bid for 2.63 times the amount of debt on offer last month, versus 2.38 on average for the past 10 auctions. The Treasury is also scheduled to sell $34 billion of five-year debt tomorrow and $24 billion of seven-year securities on March 26. The MSCI World Index of shares gained 0.7 percent today, rallying for a second day. The Standard & Poor’s 500 Index surged 7.1 percent yesterday, the most since Oct. 28. Stocks gained after the U.S. announced yesterday a plan to help banks dispose of troubled assets, aimed at financing as much as $1 trillion in purchases of illiquid real-estate holdings. Ten-year Treasuries outperformed European bonds, yielding 41 basis points less than equivalent German securities. The difference in yield, or spread, was 36 basis points yesterday, and 17 basis points at the start of the month. ‘Muted’ Response U.S. 10-year yields rose one basis point yesterday, a “muted” response to the stock rally, according to Barclays Capital Inc., one of the 16 primary dealers that trade with the Fed. Government securities are drawing support from the central bank’s plan to purchase Treasuries, Barclays strategists led by Ajay Rajadhyaksha in New York wrote to clients today. The Fed said on March 18 it will buy as much as $300 billion of Treasuries and increase purchases of agency mortgage- backed securities to reduce consumer borrowing costs. The central bank said it would concentrate on notes due in two to 10 years. It plans to purchase U.S. debt two to three times a week for six months, beginning this week. Treasuries had their biggest one-day rally since 1962 after the announcement, with yields on 10-year notes falling 47 basis points. The surge propelled Treasuries to a 1.9 percent gain so far in March, the Merrill index shows, helping trim this quarter’s loss. German government bonds returned 0.1 percent this month, and sovereign debt was little changed in Japan, based on Merrill’s indexes. China Buying Hu Xiaolian, China’s top foreign-exchange official, said yesterday the nation will keep buying Treasuries. China is the largest overseas holder of the securities, with $739.6 billion, followed by Japan, with $634.8 billion. The dollar dropped 5 percent this month as measured against a basket of six major world currencies, eroding returns for investors outside the U.S. The cost of protecting companies from defaulting on their debt plunged as demand for higher-yielding assets increased. The Markit iTraxx Crossover Index of credit-default swaps dropped 40 basis points to 870, according to JPMorgan Chase & Co. The Markit iTraxx Japan Index fell 10 basis points to 380, Morgan Stanley prices shoed. 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. Investors use them to speculate on a borrower’s ability to repay. Company Bond Yields U.S. company bonds yielded 7.96 percentage points more than Treasuries, narrowing from 8.09 percentage points two weeks ago, Merrill’s Corporate & High Yield Master index shows. Yields suggest government and central bank efforts haven’t been able to restore markets to where they were before the credit crunch last year. Average 30-year fixed mortgage rates declined to 4.98 percent in the seven days ended March 19, according to Freddie Mac, the mortgage-finance company under U.S. government control. The only time they were lower in Freddie’s 37 years of data was when they fell to 4.96 percent on March 15. Rates were about 2.32 percentage points more than 10-year Treasury yields, versus 1.57 percentage points five years ago. The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, widened to 101 basis points, from 91 basis points on Feb. 10. The spread averaged 36 basis points in 2006 before credit markets began to tumble the following year.

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