Sept. 22 (Bloomberg) -- Treasury futures contracts were little changed, snapping a two-day decline, on speculation the falling U.S. cost of living will attract investors to a record $112 billion of notes the nation is selling this week. The government will auction $43 billion of two-year notes today, $40 billion of five-year debt tomorrow and $29 billion in seven-year securities on Sept. 24. Yields indicate investors cut their bets on inflation, which erodes the value of a bond’s fixed payments, for a third day yesterday. “We don’t need to be concerned about inflation,” said Takashi Yamamoto, chief trader in Singapore at Mitsubishi UFJ Trust & Banking, a unit of Japan’s biggest bank. “That will help Treasuries.” The 10-year futures contracts for December delivery yielded 3.94 percent as of 6:45 a.m. in London, based on electronic transactions at the Chicago Board of Trade. The price rose 2/32, or 63 cents per $1,000 face amount, to 116 7/8. Trading of Treasury bills, notes and bonds was closed in Japan yesterday and will stay shut today and tomorrow for holidays. Ten-year note yields climbed two basis points yesterday to 3.49 percent. They were as high as 3.495 percent on Sept. 16 which was the most since Sept. 10. The difference between rates on benchmark 10-year notes and Treasury Inflation Protected Securities, which reflects the outlook among traders for consumer prices, dropped to 1.81 percentage points yesterday, keeping below the average of 2.19 percentage points over the past five years. Real Yield The real yield, which investors get from 10-year notes after inflation, was 4.98 percent, versus the five-year average of 1.38 percent. U.S. consumer prices fell 1.5 percent in August from a year earlier, according to the Labor Department as unemployment at the highest level in 26 years kept costs in check. The U.S. has “the opposite of stagflation,” economists led by Ethan Harris at Bank of America Merrill Lynch in New York wrote in a report Sept. 18. Stagflation occurs when stagnant growth is accompanied by high inflation. The company is one of the 18 primary dealers required to bid at U.S. debt auctions. The Federal Reserve’s announcement June 24 that it anticipates the target rate for overnight loans between banks will stay at zero to 0.25 percent for an extended period is keeping two-year notes anchored near current levels. Inflation Outlook Longer-term Treasuries tend to be influenced by the inflation outlook, while two-year notes are more likely to move in response to the Fed’s decisions on interest rates. Two-year notes have returned 1 percent in the past three months, versus a 3.4 percent gain for 10-year Treasuries, according to indexes compiled by Merrill Lynch & Co. Signs of growth in the world’s biggest economy are leading some investors to seek higher yields than those offered by government debt. “I have not been in the U.S. Treasury market,” said Jaemin Cheong, a bond trader in Seoul at Industrial Bank of Korea, the nation’s largest lender to small- and mid-sized companies. “The economy will get better as time passes.” Cheong said he is favoring bonds in South Korea, where the 10-year yield is 5.40 percent, versus 3.49 percent in the U.S. Home Sales Home sales and orders for long-lasting goods probably rose in August, extending gains that have signaled the U.S. is emerging from the worst recession since the 1930s, economists said before reports on Sept. 24 and Sept. 25. U.S. 10-year yields will rise to 3.58 percent by year-end, according to a Bloomberg survey of banks and securities companies, with the most recent forecasts given the heaviest weightings. Treasury long-term rates will rise versus shorter-maturity yields as the economic data improve, strategists led by Ajay Rajadhyaksha at Barclays Capital Inc. in New York wrote to clients today. Barclays is another primary dealer. The difference between two- and 10-year yields widened to 2.50 percentage points from 2.43 percentage points at the end of last month. Investors are buying bonds from the lowest credit-quality issuers without restraint, according to Citigroup Inc. Yields on high-yield, high-risk debt have narrowed by 80 basis points relative to benchmark rates in the past two weeks, Citigroup analysts John Fenn and Jason Shoup wrote in a Sept. 18 report. A basis point is 0.01 percentage point. Debt Sales Last week, 13 companies, including casino owner MGM Mirage and video chain Blockbuster Inc., sold more than $6.5 billion of bonds, they wrote. Merrill’s U.S. Corporate & High Yield Master index has returned almost 10 percent in the past three months, versus 2.5 percent for its U.S. Treasury Master index. The MSCI World index of stocks surged almost 18 percent during the period. The two-year notes being sold today yielded 1.05 percent in pre-auction trading, declining from 1.119 percent at the last sale of the securities on Aug. 25. Investors bid for 2.68 times the amount of debt on offer last month, compared with the average of 2.65 times for the past 10 sales. Indirect Bidders Indirect bidders, the investor group that includes central banks, bought almost half of the securities, higher than the 10- sale average of 41.5 percent. Foreign governments have little choice than to buy Treasuries because they hold so many dollars. The U.S. dollar accounts for 65 percent of world currency reserves, up from 62.8 percent in mid-2008, according to the International Monetary Fund in Washington. This week’s sales are a record for the combination of two-, five- and seven-year maturities, exceeding the $109 billion sold the week of Aug. 24. Treasuries rallied that week, with the yield on the 10-year note falling 12 basis points. The Fed bought $4.05 billion of Treasuries maturing from December 2013 to May 2015 yesterday as part of its efforts to spur growth by capping consumer borrowing costs. The central bank has purchased $289.219 billion of U.S. debt since it began buying in March, and plans to finish the $300 billion program in October. It is also scooping up $1.25 trillion of agency mortgage-backed securities and $200 billion of agency debt under a program scheduled to end in December. U.S. 30-year fixed mortgage rates have declined to 5.16 percent 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 London interbank offered rate, or Libor, for three- month loans in dollars was at a record low of 0.289 percent, according to the British Bankers’ Association. A Bloomberg survey of economists projects the Fed will keep its target interest rate at a record low when its two-day meeting ends tomorrow, helping bolster the appeal of government securities. Traders are pricing in less than a 50 percent chance of a rate increase before March, fed funds futures show. To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.

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