Sept. 18 (Bloomberg) -- Treasury 10-year notes fell, heading for their first weekly loss since the start of August, after reports on retail sales and housing starts showed the U.S. economic recovery is gaining momentum. Notes pared losses yesterday after a report on manufacturing in the Philadelphia area showed a drop in an employment index. The Treasury will sell a record $112 billion in 2-, 5- and 7-year notes next week to fund President Barack Obama’s efforts to combat the recession. “The great risk to the bond market is massive supply and nascent signs of a recovery,” said David Ader, head of U.S. government bond strategy in Stamford, Connecticut, at CRT Capital Group LLC. “The other side to that is the signs of a recovery are dubious and may be specific to stimulus that will go away. We will stay in a range of 3 1/4 to 3 1/2 percent.” The 10-year note yield rose four basis points, or 0.04 percentage point, to 3.42 percent at 8:40 a.m. in New York, according to BGCantor Market Data. The 3.625 percent security due August 2019 fell 10/32, or $3.13 per $1,000 face amount, to 101 28/32. Yields increased eight basis points this week. U.S. government debt has returned 0.2 percent this month, less than the 1.9 percent gain for the nation’s corporate bonds as investors sought higher-yielding assets, indexes compiled by Merrill Lynch & Co. show. The Standard & Poor’s 500 Index has climbed 4.4 percent in September. Cash-For-Clunkers The yield climbed from 3.27 percent on Sept. 11, which was the lowest level since July 13. Ten-year rates will advance to 3.55 percent by year-end, according to a Bloomberg survey of banks and securities companies with the most recent forecasts given the heaviest weightings. Retail sales rose in August the most in three years, helped by the government’s cash-for-clunkers program. Industrial production gained more than economists forecast and housing starts increased to a nine-month high, government and central bank reports showed this week. Treasuries have handed investors a 2.9 percent loss this year, according to Merrill Lynch & Co. indexes. The decline is a reversal from 2008 when they surged 14 percent as Lehman Brothers Holdings Inc. collapsed, global credit markets froze and investors sought the safest assets. The MSCI World Index of stocks has gained 24 percent in 2009. German government bonds returned 1 percent, and Japanese sovereign securities are little changed, the Merrill indexes show. Drop in Employment The Federal Reserve Bank of Philadelphia’s employment index fell to minus 14.3 from minus 12.9 in August, which was an 11- month high. The gauge of prices paid climbed to 14.9 from 10. The general economic index, which some economists consider a gauge of business sentiment, jumped to 14.1 this month from 4.2 percent in August. Bond bulls are betting the jobless rate at a 26-year high will keep inflation in check as the economy expands. The difference between rates on 10-year notes and Treasury Inflation Protected Securities, which reflects the outlook among traders for consumer prices, was 1.82 percentage points, compared with the five-year average of 2.19 percentage points. Consumer prices fell 1.5 percent in August compared with a year before, the Labor Department said two days ago. That’s bolstering predictions for the Fed to leave its benchmark interest rate at a record low when policy makers meet on Sept. 23. Policy makers cut the federal funds rate charged on overnight loans between banks to a range of zero to 0.25 percent in December. Futures contracts on the Chicago Board of Trade show there is a 5.6 percent chance the central bank will raise interest rates this year, declining from 7.6 percent a month ago. Treasury Yields Barclays Plc boosted its prediction for U.S. Treasury yields, saying the Fed will start increasing its target interest rate as soon as September 2010. The two-year note yield will climb to 1.30 percent by December this year and 2.60 percent by September 2010, strategists including New York-based Rajiv Setia wrote in a note received today. The 10-year yield will increase to 3.85 percent by the end of this year, Barclays said. “The biggest change is in the front end, where we expect higher two-year rates as the market prices for the advent of Fed hikes,” the team wrote. The Fed plans to buy Treasuries on Sept. 21 and Sept. 29 as part of its effort to cap consumer borrowing costs. It is purchasing as much as $300 billion of the debt in a program that started in March and is scheduled to end in October. Mortgage Rates U.S. 30-year fixed mortgage rates declined to 5.17 percent yesterday from this year’s high of 5.74 percent in June, according to Bankrate.com in North Palm Beach, Florida. Average interest rates on new car loans fell to 3.43 percent from 8.42 percent at the end of last year, according to the central bank. The U.S. plans to sell $43 billion in two-year notes on Sept. 22, $40 billion of five-year debt on Sept. 23 and $29 billion in seven-year securities on Sept. 24. Obama has increased the U.S. public debt to an unprecedented $6.94 trillion to fund spending programs aimed at snapping the economic slump. The London interbank offered rate, or Libor, for three- month loans in dollars was at 0.29 percent today, according to the British Bankers’ Association. It surged as high as 4.82 percent in October following the collapse of Lehman Brothers a month earlier. The recession started with the collapse of the U.S. property market in 2007 and has triggered $1.62 trillion of writedowns and credit losses at banks and other financial institutions, according to data compiled by Bloomberg. To contact the reporters on this story: Susanne Walker in New York at o swalker33@bloomberg.net; Anna Rascouet in London at arascouet@bloomberg.net.

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