By Wes Goodman March 31 (Bloomberg) -- Treasuries headed for their first monthly loss this year before reports today that economists said will show increases in employment and manufacturing. Benchmark 10-year yields were near the highest level since June as the government prepared to announce tomorrow the sizes of three note sales and one bond auction scheduled for next week. Federal Reserve Bank of Dallas President Richard Fisher said the U.S. can’t ignore the effect of the growing federal deficit on Treasury rates. “We’re going to have supply, and recent auctions were not so good,” said Kei Katayama, who helps oversee the equivalent of $36.8 billion as leader of the foreign fixed-income group in Tokyo at Daiwa SB Investments Ltd., a unit of Japan’s second- biggest securities broker. “There’s some concern yields will go higher.” The 10-year note yielded 3.86 percent as of 8 a.m. in London, according to BGCantor Market Data. The 3.625 percent security due in February 2020 traded at 98 2/32. Yields climbed to 3.92 percent on March 25, the highest level since June 11. Treasuries handed investors a 1.1 percent loss this month as of yesterday, based on indexes compiled by Bank of America Corp.’s Merrill Lynch unit. German bunds gained 0.2 percent, U.K. gilts returned 0.4 percent and Japanese bonds fell 0.2 percent, the indexes show. The MSCI World index of shares outperformed them all, gaining 6.2 percent including reinvested dividends, according to data compiled by Bloomberg. For the first quarter, Treasuries returned 0.9 percent, the Merrill indexes show. U.S. Jobs U.S. companies added 40,000 jobs this month, the most since December 2007, according to a Bloomberg News survey of economists before ADP Employer Services releases the figures. Factory orders rose 0.5 percent in February, following a 1.7 percent gain in January, another report may show. Investors are demanding higher returns on government debt on concern the Fed will raise interest rates this year or next while President Barack Obama attempts to sustain economic growth with record borrowing. “Even under the most optimistic of scenarios, large deficits will be run for as far as the eye can see,” Fisher said in a speech yesterday in Tucson, Arizona. Long-term Treasury yields have risen as a result, widening the difference over short-term rates to historic levels, he said. The spread between two- and 10-year yields was 2.80 percentage points, after reaching a record 2.94 percentage points on Feb. 18. Raising Rates Raising the U.S. benchmark interest rate from near zero is not on the “front burner,” Fisher said. Yields on two-year notes tend to follow what the Fed does with its target for overnight bank lending because of their short maturities. Ten-year securities are more influenced by the size of the U.S. debt and the outlook for inflation. Treasuries declined after each of the government’s three note auctions last week, which attracted less demand than traders estimated. The budget deficit, which rose to $1.4 trillion in fiscal 2009, will drive Treasury sales to a record $2.43 trillion this year, a February survey of bond-trading companies showed. China, America’s largest creditor, may curb purchases of U.S. Treasuries as its first trade deficit in 17 years leaves it with fewer dollars to invest, according to Societe Generale SA. The trade gap will reach $100 billion in 2010, driven by a 45 percent climb in imports as China’s demand growth outpaces that of other major economies, said Glenn Maguire, chief Asia- Pacific economist at Societe Generale in Hong Kong. Ten-year U.S. note yields will rise to 4.5 percent by the end of 2010, he said, capping the biggest two-year increase since 1980-81. China to Buy Less? China has accumulated Treasuries in part because of trade surpluses, along with its strategy of restraining gains in the yuan. Exports slumped last year because of a global contraction in trade. The nation holds $889 billion of the $7.4 trillion in U.S. marketable debt. Dan Fuss, whose Loomis Sayles Bond Fund beat 95 percent of competitors in the past year, says Bill Gross got it right by forecasting declines for U.S. Treasuries. U.S. 10-year yields will rise past 4 percent in 2011 as the government sells record amounts of debt, Fuss said in an interview from Tokyo on Bloomberg Television. “Bonds have seen their best days,” Gross, manager of the world’s biggest bond fund at Pacific Investment Management Co., said March 25 on Bloomberg Radio. “I agree with what Bill is saying but I don’t go to the degree that he does,” Fuss said. “I do think very strongly that we will soon see -- soon being next year sometime -- the start of a long, gradual rise in interest rates in the U.S. and in other parts of the world.” Fuss’ Loomis Sayles Bond Fund returned 44 percent in the past year, Bloomberg data show. Loomis Sayles, based in Boston, oversees $142 billion. To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.

Source