By Gavin Finch Aug. 7 (Bloomberg) -- Treasuries were little changed, with the yield on the 10-year note near a six-week high, as traders bet a government report will show the U.S. unemployment rate climbed to a 26-year high last month. Employers probably cut 325,000 workers from payrolls in July after trimming 467,000 the prior month, according to the median forecast of 82 economists in a Bloomberg survey. Standard & Poor’s 500 Index futures declined 0.3 percent. Bonds gained earlier after Royal Bank of Scotland Group Plc posted a first- half loss of 1 billion pounds ($1.67 billion) and set aside 7.5 billion pounds to cover bad loans. “The jobs report should fuel some volatility on Treasuries,” a team including Giuseppe Maraffino, a fixed- income strategist in Milan at UniCredit SpA, wrote in a report today. “As expectations are skewed to the strong side, we expect the market reaction to be more pronounced in the case of a disappointing release.” The yield on the benchmark 10-year note fell one basis point, or 0.01 percentage point, to 3.74 percent at 7:30 a.m. in New York, according to BGCantor Market Data prices. The 3.125 percent security maturing in May 2019 rose 1/32, or 31 cents per $1,000 face amount, to 94 29/32. The yield increased 26 basis points this week. The difference between 2- and 10-year yields was 2.55 percentage points, the most in over a week, suggesting investors are demanding higher yields on longer maturities because of the threat inflation will pick up as the economy starts growing. The spread between yields on 10-year notes and Treasury Inflation Protected Securities, or TIPS, which reflects the outlook among traders for consumer prices, increased to 1.91 percentage points, from near zero at the end of last year. The difference has averaged 2.20 percentage points for the past five years. Bond Returns Ten-year yields rose to their highest level since June this week as reports showing an improvement in the world’s largest economy sapped demand for the relative safety of government assets and the Standard & Poor’s 500 Index of stocks climbed above 1,000 for the first time since November. Government bonds fell 5 percent this year, according to Merrill Lynch & Co.’s U.S. Treasury Master index, as President Barack Obama increased the amount of marketable debt to a record $6.78 trillion. German bonds returned 0.5 percent and Japanese debt lost 0.6 percent, Merrill indexes show. Deutsche Bank Securities Inc. is betting that government securities will decline as the U.S. labor market revives. “Employment is poised for a significant improvement,” Joseph LaVorgna and Carl Riccadonna, economists at Deutsche Bank in New York, wrote in a research note. Yield Forecast Deutsche Bank, one of the 18 primary dealers that trade directly with the Federal Reserve, is forecasting the 10-year yield will rise to 4 percent by year-end. LaVorgna and Riccadonna revised their forecast for today’s jobs number to a loss of 150,000 from decline of 325,000, they said in their report yesterday. The prediction makes them the most optimistic among the 82 economists surveyed. Some parts of the credit market are normalizing after freezing last year, yields indicate. The London interbank offered rate, or Libor, for three- month dollar loans fell to a record of 0.46 percent today. The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, was 0.29 percentage points, close to the least since March 2007. Mortgage Rates U.S. 30-year fixed mortgage rates rose to 5.47 percent from this year’s low of 4.85 percent in April, according to Bankrate.com in North Palm Beach, Florida. The rate was as high as 5.74 percent in June. The U.S. will next week auction $37 billion of three-year notes, $23 billion in 10-year securities and $15 billion in 30- year bonds. The Treasury Department also signaled that issuance of TIPS will rise in fiscal year 2010 and said it would consider replacing the 20-year securities with 30-year ones. “There is a marked tendency for Treasury supply to keep building even after recessions end,” William O’Donnell, U.S. government bond strategist at RBS Securities Inc. in Stamford, Connecticut, wrote in a note to clients. To contact the reporters on this story: Gavin Finch in London at gfinch@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net.

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