By Wes Goodman and Paul Dobson 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, lessening demand for the safety of government debt. Benchmark 10-year yields were near the highest level since June before tomorrow’s announcement of the sizes of three note sales and one bond auction scheduled for next week. Treasuries declined after each of the government’s three note auctions last week, which attracted less demand than traders estimated. Federal Reserve Bank of Dallas President Richard Fisher said the growing federal deficit is pushing up Treasury rates. “If the employment market starts to show positive signs, that supports yields,” said Rasmus Rousing, a fixed-income strategist in Zurich at Credit Suisse Group AG. “Demand for Treasuries was not as strong as had been seen in the past and that lifted yields. If there is sluggish demand, it will have a market impact.” The 10-year note yielded 3.86 percent as of 10 a.m. in London, according to data compiled by Bloomberg. 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. Record Sales Investors are demanding higher returns on government debt on speculation the Fed will raise interest rates this year or next while President Barack Obama attempts to sustain economic growth with record borrowing. 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. The U.S. can’t “turn a blind eye” to the effect on yields of the deficit, Fisher said in a speech yesterday in Tucson, Arizona. “Even under the most optimistic of scenarios, large deficits will be run for as far as the eye can see,” he said. “Long-term Treasury yields have risen as a result, widening the difference over short-term rates to historic levels, he 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. The spread between two- and 10-year yields was 279 basis points, or 2.79 percentage points, from 280 basis points yesterday, after reaching a record 294 points on Feb. 18. Job Gains U.S. companies added 40,000 jobs this month, the most since December 2007, according to a Bloomberg News survey of 35 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, according to a separate survey of 65 economists. The Labor Department’s payrolls report, due to be published on April 2, will show employers added 185,000 jobs this month after eliminating 36,000 positions in February, according to the median forecast of 81 economists in a Bloomberg News survey. The unemployment rate probably held at 9.7 percent, according to analysts. Yield Increases Dan Fuss, whose Loomis Sayles Bond Fund’s performance is in the 95th percentile among peers 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. 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. Trade Gap 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 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. 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. To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net; Paul Dobson in London at pdobson2@bloomberg.net.

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