Oct. 26 (Bloomberg) -- Treasuries fell, with 10-year note yields touching their highest level in two months, as the U.S. prepared to sell a record $123 billion of notes to fund its stimulus program and record deficits. Government securities declined for a fourth day before today’s offering of $7 billion in five-year Treasury Inflation Protected Securities, the first of four note auctions this week. The Federal Reserve is likely to end its $300 billion debt buybacks on Oct. 29. “The story for this week is the four auctions and that could be a bit problematic,” said David Ader, head of U.S. government bond strategy in Stamford, Connecticut, at CRT Capital Group LLC. The yield on the 10-year note increased eight basis points, or 0.08 percentage point, to 3.56 percent at 10:34 a.m. in New York, according to BGCantor Market Data, the highest level since Aug. 24. The 3.625 percent security maturing in August 2019 fell 20/32, or $6.25 per $1,000 face amount, to 100 18/32. “The momentum suggests we could move higher in yields,” CRT’s Ader said. “If we break 3.52 percent, then the next projection is 3.76 percent. Resistance is at 3.28 percent.” The 10-year yield will increase to 3.56 percent by year- end, according to the average forecast of analysts in a Bloomberg survey, with the most recent estimates given the heaviest weightings. Five-Year TIPS The Standard & Poor’s 500 Index advanced 1 percent. The MSCI World Index of shares rose 0.1 percent, after a four-day decline. The U.S. is scheduled to sell $44 billion of two-year notes tomorrow, $41 billion of five-year notes on Oct. 28 and $31 billion of seven-year securities on Oct. 29. Five-year TIPS yielded 0.82 percent, falling from 1.278 percent the last time the government sold the notes on April 23. Inflation-protected notes pay interest at lower rates than Treasuries on a principal amount that’s linked to the Labor Department’s consumer price index. Investors bid for 2.66 times the amount of debt on offer in April, versus the average of 2.12 times for the past 10 sales. Treasury has sold $1.6 trillion in notes and bonds to finance a budget deficit that reached a record $1.4 trillion in fiscal year 2009 that ended Sept. 30. Debt amounted to 9.9 percent of the nation’s economy, triple the size of the 2008 shortfall. ‘Sales, Sales, Sales’ After issuing $1.9 trillion of short-term securities to finance President Barack Obama’s efforts to end the worst recession since the 1930s, the Treasury plans to lengthen the average due date of its outstanding debt to 72 months from a 26- year low of 49 months. That may mean boosting sales of 10- and 30-year securities by 40 percent over the next year to $600 billion, according to FTN Financial in Memphis, Tennessee, driving down prices of longer-term securities. “The Treasury will want a longer debt duration before interest rates rise,” said Tsutomu Komiya, an investment manager in Tokyo at Daiwa Asset Management Co., which oversees the equivalent of $105.8 billion. “We have to deal with sales, sales, sales. The huge issuance will make Treasury yields go higher.” Replacing bills with bonds may drive up the so-called yield curve as the Fed keeps its target rate for overnight loans between banks unchanged near zero until the second quarter of 2010, according to the weighted average of 67 forecasts in a Bloomberg survey. The gap between yields on 2- and 10-year notes widened to 2.48 percentage points from 1.29 percentage points at the end of last year. Target Rate “The talk by the Treasury pertaining to the extension of the debt will continue to weigh on the back-end of the market and allow the trading range to resolve toward higher rates going forward,” John Spinello, chief technical strategist in New York at Jefferies Group Inc., wrote in a note to clients. The firm is one of 18 primary dealers that trade with the Fed. The Fed is scheduled on Oct. 29 to complete the $300 billion Treasury purchase program it began in March, part of its effort to cap consumer borrowing costs. The central bank will probably discuss next month how and when to signal the possibility of raising interest rates, the Wall Street Journal reported on Oct. 24, without citing anyone. Members of the central bank are beginning to consider the best strategy for letting the market know that an “extended period” of record-low rates will draw to an end, the Journal reported. Treasury Losses Fed Chairman Ben S. Bernanke and his fellow policy makers cut the target rate for overnight loans between banks to a range of zero to 0.25 percent at the end of 2008. They will keep the benchmark there until August, when central bankers will boost it to 0.5 percent, according to the median estimate of 47 economists surveyed by Bloomberg from Oct. 1 to Oct. 8. The world’s largest economy expanded at a 3.2 percent pace from July through September, after shrinking in the previous four quarters, according to the median estimate of 65 economists in a Bloomberg survey. The Commerce Department’s report is due on Oct. 29. The difference between rates on seven-year notes and TIPS, which reflects the outlook among traders for consumer prices over the life of the securities, widened to 175 basis points from 80 basis points six months ago. Treasuries handed investors a 3.1 percent loss in 2009, versus a 1.2 percent gain for German bonds, while Japanese sovereign securities are little changed, according to indexes compiled by Merrill Lynch. To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net; Matthew Brown in London at mbrown42@bloomberg.net.

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