By Cordell Eddings and Lukanyo Mnyanda Nov. 9 (Bloomberg) -- Treasuries were little changed as the U.S. prepared to sell $81 billion of 3-, 10- and 30-year debt this week while signs of economic recovery boosted investors’ appetite for higher-yielding assets. The U.S. begins this week’s sales today with a record $40 billion offering of three-year notes. Stocks and commodities rallied and the dollar weakened to a 15-month low against the currencies of major U.S. trading partners after the Group of 20 nations agreed to maintain measures to boost economic growth and remained silent on the U.S. currency’s weakness. “We are seeing a pricing concession ahead of today’s auction,” said Christian Cooper, an interest-rate strategist at RBC Capital Markets in New York, one of 18 primary dealers required to bid at Treasury auctions. “Confidence seems to be returning to riskier assets and a lot of money is coming off the sidelines to be put to work which, so we could see both equities and bonds rally going forward.” The 10-year note yield fell one basis point, or 0.01 percentage point, to 3.49 percent at 9:50 a.m. in New York, according to BGCantor Market Data. The 3.625 percent security maturing in August 2019 rose 3/32, or 94 cents per $1,000 face amount, to 101 4/32. The Standard & Poor’s 500 Index advanced 0.9 percent. December gold futures rose to $1,111.70 an ounce on the New York Mercantile Exchange’s Comex division as a weaker dollar prompted investors to buy bullion as an alternative investment. Three-Year Sale The three-year notes scheduled for sale today yielded 1.422 percent in pre-auction trading, versus 1.445 percent at the prior sale on Oct. 6. The note sold last month yielded 1.37 percent today, rising one basis point from last week. Investors bid for 2.76 times the amount of three-year debt on offer on Oct. 6, down from a so-called bid-to-cover ratio of 3.02 times at the previous auction. Indirect bidders, the category of investors that includes foreign central banks, purchased 49.1 percent of the notes last month. The figure was more than 50 percent at the sales in July, August and September. Three-year notes returned 1.3 percent in 2009, versus a 2.8 percent loss for the entire Treasury market, according to indexes compiled by Bank of America Corp.’s Merrill Lynch unit. The Treasury is scheduled to sell $25 billion of 10-year debt tomorrow. The difference between two- and 30-year yields was at 3.56 percentage points, the most since July, before the $16 billion sale of 30-year bonds on Nov. 12. Raise Taxes Investors should sell 5-year Treasury notes and buy 30-year Treasuries during this refunding week, William O’Donnell, U.S. government bond strategist at RBS Securities Inc. in Stamford, Connecticut, another primary dealer, wrote in a note to clients. “The recent steepening is getting overdone and I expect the 30yr to recover lost ground against the curve once the refunding passes.” The U.S. budget deficit widened to a record $1.42 trillion in the 12 months to Sept. 30 as President Barack Obama increased spending to revive the economy. The U.S. House approved health-care legislation that would cost more than $1 trillion over 10 years, indicating the government will have to increase its debt sales to pay for it. “We are kind of caught between record supply and the new health care bill passing that passed in the House,” said Thomas L. di Galoma, head of U.S. rates trading at Guggenheim Capital Markets LLC, a New-York based brokerage for institutional investors. “If it gets passed in the Senate it will raise taxes on consumers and corporations, which is not good for the economy and adds to the weakness in the dollar. At the end of the day the lower dollar does bring in demand for auctions this week.” Decade of Deflation Japanese investors who lived through a decade of deflation and recessions say U.S. Treasuries are a bargain. Deflation, a general decline in prices, enhances the value of a bond’s fixed payments. Japan bought a net $105 billion of U.S. government debt through August, exceeding China as the biggest foreign buyer and boosting its holdings to $731 billion, or more than 10 percent of the total market, Treasury Department data show. The 17 percent increase is the most since a 25 percent surge in 2004. Mizuho Asset Management Co. and Mitsubishi UFJ Asset Management Co. are among the investors buying U.S. bonds because they see similarities between America’s response to the recession and their government’s efforts during the so-called lost decade of the 1990s. “The U.S. economy has faced a double whammy: the recession and credit contraction,” said Akira Takei, head of non-yen denominated bonds at Mizuho Asset in Tokyo, a unit of Japan’s second-largest bank. “The U.S. will face a triple whammy with deflation. That’s good for the Treasury market.” Yields indicate inflation expectations are increasing. The difference between rates on U.S. 10-year notes and Treasury Inflation Protected Securities, or TIPS, which reflects the outlook among traders for consumer prices, widened to 2.23 percentage points from about zero at the end of last year. To contact the reporters on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net; Cordell Eddings in New York at ceddings@bloomberg.net.

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