By Wes Goodman Nov. 16 (Bloomberg) -- Treasuries were little changed, snapping a gain from last week, before a government report that economists said will show U.S. retail sales rebounded in October. The difference between two- and 10-year yields was 2.60 percentage points, more than doubling since late last year. Government efforts to snap the economic recession are raising speculation inflation will pick up as gross domestic product expands, leading investors to demand more yield to make longer- term loans. “We’ve been trimming” holdings of Treasury futures contracts, said Roger Bridges, the head of bonds who oversees the equivalent of about $11.2 billion of debt at Tyndall Investment Management Ltd. in Sydney, part of Australia’s third- largest insurer. “They’ve thrown everything but the kitchen sink at the market and we’re waiting to see if it works.” The 10-year note yielded 3.42 percent as of 6:31 a.m. in London, according to BGCantor Market Data. The 3.375 percent security maturing in November 2019 traded at 99 19/32. Ten-year yields declined eight basis points last week. A basis point is 0.01 percentage point. Two-year yields, which are more sensitive to what the Federal Reserve does with interest rates, were little changed at 0.82 percent. The central bank repeated its pledge on Nov. 4 to keep interest rates near zero for an “extended period.” Retail sales increased 0.9 percent, after dropping 1.5 percent during September, according to the median of 66 estimates in a Bloomberg News survey before the Commerce Department report today. Output, Housing Output rose for a fourth month, Fed figures tomorrow will show, and the Commerce Department will say on Nov. 18 that housing starts reached the highest level this year, separate Bloomberg surveys show. Investors are demanding higher yields than at the start of the year after the Fed and the U.S. government spent, lent or guaranteed $11.6 trillion to end the steepest economic recession since the 1930s. President Barack Obama increased the marketable U.S. debt to $6.95 trillion in September as he borrows record amounts to spur growth. The government is scheduled to announce on Nov. 19 how much it plans to raise in two-, five- and seven-year sales over three days starting Nov. 23. ‘Case for Higher Rates’ “The case for higher rates remains strong,” analysts at Deutsche Bank AG led by Mustafa Chowdhury in New York wrote in a report Nov. 13. “The long end” of the range of maturities, “is most susceptible to upward pressure in yield levels.” The company is one of the 18 primary dealers that are required to bid at U.S. debt auctions. Ten-year yields will rise to 3.90 percent by the middle of next year, according to a Bloomberg survey of banks and securities companies, with the most recent forecasts given the heaviest weightings. Treasuries have handed investors a loss of 2.5 percent this year as the economy showed signs of reviving, according to indexes compiled by Bank of America’s Merrill Lynch unit. German bonds returned 1.7 percent, while Japan’s debt gained 0.3 percent, the indexes show. U.S. corporate bonds have outperformed them all, returning almost 25 percent as investors sought higher-yielding assets. Rising yields on Treasuries, which are used as a benchmark for everything from mortgage rates to corporate bonds, may hamper Fed Chairman Ben S. Bernanke’s efforts to reduce borrowing costs. U.S. 30-year fixed mortgage rates have fallen to 5.02 percent from this year’s high of 5.74 percent in June, according to Bankrate.com in North Palm Beach, Florida. They were as low as 4.85 percent in April. Ried, Thunberg A survey of investors by Ried, Thunberg & Co. shows fund managers turned less bearish on Treasuries. The company’s index measuring investors’ outlook on government debt through June rose to 41 for the seven days ended Nov. 13 from 39 the previous week. A reading below 50 shows investors expect prices to fall. The economic analysis company, based in Jersey City, New Jersey, surveyed 23 fund managers controlling $1.33 trillion. Inflation, which erodes the value of a bond’s fixed payments, hasn’t been a problem in the U.S. so far. U.S. consumer costs fell 1.3 percent in September from a year earlier, according to the Labor Department. Joblessness at a 26-year high is helping curb increases in the cost of living, Labor Department reports may show this week. The consumer price index, due on Nov. 18, rose 0.2 percent in October for a second month, Bloomberg surveys show. Prices fell 0.3 percent from the year before, according to the surveys. Option Skew The options market shows investors are growing increasingly wary that U.S. debt sales may push yields higher even as inflation remains in check. The cost to hedge against rising yields on Treasuries as measured by the so-called skew in options on interest-rate swaps is at a record high, according to Barclays Plc data. At more than 37 basis points, the measure is almost 40 times higher than the average before credit markets seized up in August 2007. The 13-member committee of bond dealers and investors that Treasury Secretary Timothy Geithner depends on for advice, and includes officials of Pacific Investment Management Co. and Goldman Sachs Group Inc., highlighted the surge on page 36 of a 67-page report on Nov. 3. On the same page, they showed inflation expectations are subdued based on gauges watched by the Fed. In their discussions, the group noted that a second year of government debt sales approaching $2 trillion may weigh on investors. Inflation Bets Yields indicate inflation expectations rose in 2009. The difference between rates on 10-year notes and Treasury Inflation Protected Securities, or TIPS, which reflects the outlook among traders for consumer prices, widened to 2.16 percentage points from about zero at the end of 2008. The spread is in line with the five-year average of 2.17 percentage points. Gold for immediate delivery rose to a record $1,130.43 an ounce today. China’s banking regulation chief joined Hong Kong’s leader in blaming the Fed’s interest-rate policy for fueling speculative capital flows that may spur asset-price inflation. “The continuous depreciation in the dollar, and the U.S. government’s indication that, in order to resume growth and maintain public confidence, it basically won’t raise interest rates for the coming 12 to 18 months, has led to massive dollar arbitrage speculation,” Liu Mingkang, chairman of the China Banking Regulatory Commission, said in Beijing yesterday. Liu spoke two days after Donald Tsang, the chief executive of Hong Kong, said the Fed’s policy of keeping rates near zero risks sparking the next financial crisis. Intercontinental Exchange Inc.’s U.S. Dollar Index, which tracks the currency’s performance against the euro, yen, pound, Canadian dollar, Swiss franc and Swedish krona, has fallen 16 percent from its high this year on March 4. To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.

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