By Wes Goodman March 9 (Bloomberg) -- Treasuries snapped a two-day decline on speculation rising fuel costs caused by violence in Libya will slow the U.S. economic expansion. Traders cut bets on the Federal Reserve raising interest rates this year, with futures showing the probability of an increase falling to 36 percent from 54 percent a month ago. The average price for unleaded gasoline in the U.S. rose to $3.517 per gallon, the most in 29 months, according to the American Automobile Association. The government is scheduled to sell $21 billion of 10-year notes today. “Higher commodity prices may affect consumer spending and that may lead to slower growth,” said Tomohisa Fujiki, an interest-rate strategist at BNP Paribas Securities Japan Ltd. in Tokyo. “In that case the Treasury market should rally.” BNP’s U.S. unit is one of the 20 primary dealers that trade directly with the Fed. The yield on the 10-year note dropped one basis point to 3.54 percent as of 7:05 a.m. in London, according to BGCantor Market Data. The 3.625 percent security due in February 2021 climbed 3/32, or 94 cents per $1,000 face amount, to 100 22/32. Americans “will have less money to spend,” said David Rolley, who helps manage $152 billion as co-head of global fixed income at Loomis Sayles & Co. in Boston. The company cut its 2011 U.S. growth forecast to 3.1 percent from 3.5 percent due to the surge in oil prices, Rolley said at a conference in Sydney. The U.S. government is considering using petroleum reserves to ensure rising oil costs resulting from turmoil in the Middle East and North Africa don’t threaten the economy, William Daley, President Barack Obama’s chief of staff, said March 6 on NBC’s “Meet the Press” program. Annual Loss Treasuries have still handed investors a 0.6 percent loss this year, based on Bank of America Merrill Lynch data, as the global recovery strengthened. The decline extends a 2.7 percent slide from the fourth quarter of 2010. The MSCI All Country World Index of stocks has returned 4.4 percent in 2011 including reinvested dividends. Ten-year notes have lagged behind the broader market, falling 1.3 percent in 2011, according to Bank of America Merrill Lynch, as investors added to bets inflation will quicken. The 10-year securities scheduled for sale today yielded 3.55 percent in pre-auction trading, compared with 3.665 percent the last time the notes were sold on Feb. 9. Investors bid for 3.23 times the amount of debt offered last month, versus the average of 3.08 for the past 10 auctions. Indirect bidders, the group that includes foreign central banks, bought 71.3 percent of the debt, while the 10-sale average is 49.2 percent. Direct bidders, non-primary dealers buying for their own accounts, purchased 0.5 percent, the least since January 2009. ‘Not Bullish’ “We’re not so bullish on Treasuries,” said Masataka Horii, one of four investors for the $32.9 billion Kokusai Global Sovereign Open fund in Tokyo, Asia’s biggest bond fund. “The economy is getting better and better.” Kokusai Global Sovereign Open is favoring bonds that will fall less in price if yields rise, Horii said. A Commerce Department report March 11 will show retail sales gained for en eighth month in February, based on a Bloomberg News survey, after the Labor Department said March 4 that the unemployment rate fell. At Bank of America, the largest U.S. lender, the company’s home-mortgage business is in “recovery mode,” Chief Executive Officer Brian T. Moynihan said yesterday. Inflation Outlook The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of expectations for consumer prices over the life of the debt, widened to 2.57 percentage points yesterday, the most in 32 months. Treasury investors were the most pessimistic since May in a weekly survey conducted by J.P. Morgan Securities LLC, another primary dealer. The company’s index of net longs -- the difference between investors betting prices will increase and those expecting declines -- fell to negative 11 on March 7 from positive 4 the week before. Demand rose at a $32 billion auction of three-year notes yesterday with investors submitting bids for 3.22 times the amount of debt on offer, the most since November. The Fed is scheduled to buy $5 billion to $7 billion of Treasuries due from March 2015 to August 2016 today as part of its effort to sustain the economic expansion. The central bank said in November it would buy $600 billion of government securities, and it has completed roughly 67 percent of the plan, Asha Bangalore, an economist at Northern Trust Securities Inc. in Chicago, wrote in a report yesterday. Fed Chairman Ben S. Bernanke has indicated that only under conditions of strong sustained growth, expanding payrolls, and inflation readings that are consistent with price stability would the central bank consider terminating the program, the report said. “Current economic data indicate that the Fed is not even close to meeting these targets,” Bangalore wrote. --With assistance from Candice Zachariahs and Sarah McDonald in Sydney. Editors: Nate Hosoda, Nicholas Reynolds To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net. To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net.

Source