Oct. 31 (Bloomberg) -- Treasury 10-year notes fell in October for the first time in four months as investors bet the Federal Reserve may begin to signal an increase in interest rates from record lows as the economy shows signs of growth. Thirty-year bonds fell the most since May as investors bet the Treasury will increase long-term debt sales as the government seeks to lock in near record-low borrowing costs. The U.S. sold $201 billion of notes and bonds this month. The Fed meets next week to discuss monetary policy and the economic outlook. The U.S. economy shed 175,000 jobs in October, according to the median of economists surveyed by Bloomberg before a Labor Department report on Nov. 6. “It’s people getting more comfortable with the Fed’s stance,” said Jason Brady, a managing director at Thornburg Investment Management in Santa Fe, New Mexico, which oversees $4 billion in fixed income. “If they believe that there’s a lot of supply, that’s going to hurt relatively longer-dated assets.” The 10-year note yield rose eight basis points for the month, or 0.08 percentage point, to 3.38 percent, according to BGCantor Market data. That’s the biggest increase in yield since May. The 3.625 percent security due in August 2019 fell 22/32, or $6.88 per $1,000 face amount, to 102. Thirty-year yields rose 18 basis points in October. The gap between 2- and 10-year notes widened the most on a monthly basis since May. ‘Heightened Uncertainty’ Returns on Treasury debt of all maturities fell in October for the first time since June, declining 0.6 percent through Oct. 29, according to Merrill Lynch & Co.’s U.S. Treasury Master Index. The securities have fallen 3.1 percent this year, and are heading for their worst performance since 1994 when they lost 3.3 percent. The yield on the two-year note, most sensitive to monetary policy, on Oct. 23 rose above 1 percent for the first time this month after Fed Bank of Philadelphia President Charles Plosser on Oct. 22 told Bloomberg Radio his “instinct is the time for raising rates will be before many of my colleagues” think it is. Central bankers will probably discuss at their November meeting how and when to signal the possibility of raising interest rates, the Wall Street Journal reported on Oct. 24, without citing anyone. “There’s heightened uncertainty on the next move,” George Goncalves, chief fixed-income rates strategist at Cantor Fitzgerald LP, one of the 18 primary dealers that trade directly with the Fed, said on Oct. 23. “The front end of the curve is becoming more volatile.” Government Intrusion Treasuries declined as reports added to evidence of an economic recovery. Industrial production in the U.S. rose more than anticipated in September, the Fed said on Oct. 16, while the Fed Bank of New York said on Oct. 15 that its general economic index soared to the highest since mid-2004. The world’s largest economy expanded 3.5 percent from July through September, propelled by emergency programs to boost buying of cars and homes, after shrinking the previous four quarters, a Commerce Department report showed Oct. 29. The worst financial crisis since the Great Depression has prompted the biggest government intrusion into the economy since World War II, and may have shaken companies and consumers so much that their spending won’t be enough to replace federal support. “The big question people are looking to have answered is if the economy will be able to free-stand on its own without government intervention and fiscal stimulus,” said Thomas Tucci, head of U.S. government bond trading at primary dealer RBC Capital Markets in New York. ‘Losing Faith’ U.S. debt pared losses as other reports signaled the recovery will be slow. Consumer spending fell 0.5 percent in September after a 1.4 percent jump in August, Commerce Department figures showed yesterday. The Conference Board’s confidence index dropped to 47.7 from a revised 53.4 in September and a measure of employment availability slid to a 26- year low, a report showed on Oct. 27. “People are losing faith in the economy,” Tom di Galoma, head of U.S. rates trading at Guggenheim Capital Markets LLC, a New-York based brokerage for institutional investors, said on Oct. 27. “Jobs aren’t being created. They drive the consumer. That’s having a very adverse impact.” The unemployment rate rose to 9.9 percent in October, according to the median forecast of economists surveyed by Bloomberg before the report on Nov. 6. Debt Sales The Treasury’s auctions this month brought its total sales of coupon securities in 2009 to $1.718 trillion, compared with $665 billion in the first 10 months of 2008. This week’s offerings of two- and five-year debt drew the strongest demand in two years, signaling the unprecedented amount of debt being sold to finance the record budget deficit is not damping investor demand. Sales of coupon-bearing Treasuries will increase to $2.38 trillion in the fiscal year that began Oct. 1, from $1.81 trillion in the prior 12 months, primary dealer Goldman Sachs Group Inc. said in a report on Oct. 20. The U.S. plans to increase the average maturity of its outstanding debt, currently $7 trillion, to try to lock long- term borrowing costs that are low by historic standards. The average maturity of U.S. government debt fell to a 26- year-low of 49 months in December as the government stepped up sales of short-term securities to meet immediate demand for cash. To meet its goal of increasing the average life to 72 months the Treasury would have to sell $350 billion of 10-year notes and $250 billion in 30-year bonds, an increase of more than 40 percent of the securities over this year’s levels. Spent, Lent, Guaranteed As a result of the reliance on short-term financing, nearly one-fourth of outstanding public debt, $1.6 trillion, will mature within the next year, forcing the Treasury to raise more money, even as the Congressional Budget Office forecasts the deficit will remain at $1.4 trillion. The Fed completed its $300 billion Treasury purchase program on Oct. 29, which it began in March as part of an effort to cap consumer borrowing costs. “Some caution should be observed in the future as to when the Fed will look to ‘give back’ those bonds to the market,” Kevin Giddis, head of fixed-income sales, trading and research at brokerage firm Morgan Keegan Inc. in Memphis, Tennessee, wrote yesterday in a note to clients yesterday. “For the near term, as long as the economy continues to sputter, job growth is negative and price pressures remain subdued, it is hard to shed bonds in favor of anything else.” The Fed and the U.S. government have spent, lent or guaranteed $11.6 trillion to spur the world’s biggest economy and thaw credit markets that froze last year. To contact the reporter on this story: Daniel Kruger in New York at dkruger1@bloomberg.net.

Source