U.S. 30-year bonds fell for a second day after Asian stocks rose and a Federal Reserve report showed consumer credit surged by the most in 10 years, signaling households are more willing to borrow and spend. Treasuries have failed to extend 2011’s rally as the world’s biggest economy shows signs of improving. Benchmark 10- year yields were still within 31 basis points of the record low, reflecting demand for the relative safety of American government debt during the European fiscal crisis. The U.S. is scheduled to auction $32 billion of three-year notes today, after a sale of the securities last month drew record demand. “The flight to quality continues, and that is keeping yields low,� said Hiroki Shimazu, an economist in Tokyo at SMBC Nikko Securities Inc., a unit of Japan’s third-largest publicly traded bank by assets. “It’s difficult to say when yields will rise, but the time is getting near because the U.S. economy is expanding.� Thirty-year rates rose two basis points, or 0.02 percentage point, to 3.05 percent as of 7 a.m. in London, according to Bloomberg Bond Trader prices. The 3.125 percent security maturing in November 2041 declined 11/32, or $3.44 per $1,000 face amount, to 101 17/32. Ten-year yields increased two basis points to 1.98 percent, versus the record low of 1.67 percent set Sept. 23. Japan’s 10-year rate was little changed at 0.975 percent, down from 1.2 percent a year ago. Consumer Borrowing U.S. consumer credit increased by $20.4 billion in November, the most since November 2001, Fed figures showed yesterday in Washington. The unemployment rate fell to 8.5 percent last month, the least since February 2009, the Labor Department reported Jan. 6. The MSCI Asia Pacific Index of shares advanced 1.1 percent, gaining for a second day. Some market rates indicate investors are willing to accept lower yields to buy corporate securities as the economy improves. The difference between U.S. two-year swap rates and the yield on same maturity Treasuries shrank to 39 basis points today, the least since Dec. 8. Investors use swaps to exchange fixed and floating interest-rate obligations. The difference, the gap between the fixed component and the Treasury rate, is a gauge of investor demand for higher-yielding assets versus sovereign debt. Libor Fall The three-month London interbank offered rate for loans in dollars fell for a second day yesterday to 0.581 percent, the first back-to-back decline since June. The Fed is replacing $400 billion of shorter-maturity Treasuries in its holdings with longer-term debt to cap borrowing costs and foster economic growth, in a plan it announced in September. The central bank is scheduled to buy as much as $1.5 billion of Treasury Inflation Protected Securities due from January 2018 to February 2041 as part of the program today, according to the New York Fed’s website. Fed Bank of Atlanta President Dennis Lockhart said yesterday he sees the economy improving this year. Following his speech in Atlanta, he told reporters he is “open-minded� about the need for more stimulus. Treasuries fluctuated yesterday amid skepticism that Europe’s debt crisis will be resolved after the leaders of Germany and France said rules for closer fiscal union among the euro-area nations may be ready a month early. Three-Year Auction The three-year notes scheduled for sale today yielded 0.38 percent in pre-auction trading. The record low auction rate was 0.334 percent set in September. Last month’s sale drew a yield of 0.352 percent, with investors submitting bids for an unprecedented 3.62 times the amount of debt offered for this maturity. The U.S. is also scheduled to sell $21 billion of 10-year debt tomorrow and $13 billion of 30-year bonds on Jan. 12. The Treasuries rally has further to go, according to Deutsche Bank AG, one of the 21 primary dealers that trade with the Fed. Ten-year yields will drop to 1.5 percent early this year, the company in a report distributed by e-mail yesterday. “Economic data continues to surprise to the upside,� according to the report by Dominic Konstam, the bank’s global head of interest-rate research in New York. “The relative robustness of Treasuries affirms aggressively the breakdown in the statistical relationship with economic data. We think this is because not much else matters, except Europe and to some extent skepticism about the sustainability of the recovery.� Yield Forecasts Most analysts expect yields to rise. Ten-year rates will advance to 2.1 percent by March 31 and to 2.63 percent by Dec. 31, according to a Bloomberg survey of banks and securities companies, with the most recent forecasts given the heaviest weightings. Treasuries have handed investors a 0.3 percent loss in January, according to Bank of America Merrill Lynch indexes. U.S. company bonds have returned 0.2 percent, and Treasury Inflation Protected Securities gained 0.6 percent, the figures show. The MSCI All Country World Index (MXWD) of stocks has gained 1.3 this year including reinvested dividends, according to data compiled by Bloomberg. The figures compare with a 9.8 percent surge for Treasuries in 2011 and a 6.9 percent slide for the MSCI index over the same period. To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net To contact the editor responsible for this story: Garfield Reynolds at greynolds1@bloomberg.net

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