By Wes Goodman Nov. 19 (Bloomberg) -- Treasuries were little changed, with two-year yields near the lowest level in nine months, as traders bet the U.S. economy is growing too slowly for the Federal Reserve to raise interest rates next year. Two-year yields fell for a fifth day yesterday after Federal Reserve Bank of St. Louis President James Bullard said experience indicates policy makers may not start to increase interest rates until early 2012. The U.S. is scheduled to announce today how much it plans to raise in three note auctions next week, and economists are forecasting two of the sales will be increased to record amounts. “The U.S. economy is still very stagnant,” said Satoshi Okumoto, a general manager at Fukoku Mutual Life Insurance Co. in Tokyo, which has the equivalent of $61.6 billion in assets. “That is helping the market, leading people to buy.” Two-year notes yielded 0.75 percent as of 2:33 p.m. in Tokyo, according to BGCantor Market Data. The 1 percent security maturing in October 2011 traded at 100 15/32. The yield was as low as 0.73 percent yesterday, a level not seen since Jan. 23. Ten-year yields were little changed at 3.36 percent. Okumoto cut his forecast for 10-year rates at year-end to 3.75 percent from 4 percent. Tsutomu Komiya, an investor in Tokyo at Daiwa Asset Management Co., which oversees $77 billion and is part of Japan’s second-largest brokerage, trimmed his year-end forecast to 3.5 percent from 4 percent. The pace of U.S. economic growth, which was 3.5 percent in the third quarter, will slow to 3 percent in the fourth and to 2.65 percent in the first three months of 2010, according to Bloomberg surveys of banks and securities companies. Leading Indicators The Conference Board’s index of U.S. leading indicators rose 0.4 percent in October after climbing 1 percent in September, according to the median forecast of 58 economists surveyed by Bloomberg News before the report today. Separate figures will show manufacturing accelerated in the Philadelphia region this month, another survey of economists indicated. The U.S. will probably sell $44 billion of two-year notes on Nov. 23, $42 billion of five-year debt on Nov. 24 and $32 billion of seven-year securities on Nov. 25, according to Wrightson ICAP LLC, a Jersey City, New Jersey-based research firm that specializes in government finance. The two-year auction would match last month’s record. The five- and seven-year sales would be the highest ever. U.S. marketable debt totaled $6.95 trillion in October, after climbing to a record $7.01 trillion in September. Pricier CDS The difference between two- and 10-year yields widened yesterday after a government report showed the cost of living rose more than forecast in October. The spread was 2.61 percentage points today, increasing from 2.43 percentage points a month ago. Two-year yields tend to track the outlook for interest rates, while 10-year yields are more influenced by inflation. The cost to hedge against losses on Treasuries using credit-default swaps climbed to the highest level in almost four months, indicating investors are becoming less confident in U.S. securities. Swaps on U.S. government debt in euros for five years increased to 31.37 basis points yesterday, the most since July 24. That means it costs 31,370 euros ($46,846) a year to protect 10 million euros of debt. Credit-default swaps are contracts designed to protect against or speculate on default. Inflation Expectations 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 2.20 percentage points from almost zero at the end of 2008. The five- year average is 2.18 percentage points. TIPS have returned 11 percent this year, versus a 2 percent loss for conventional Treasuries, according to data compiled by Bank of America’s Merrill Lynch unit. Futures contracts on the Chicago Board of Trade show just a 9.2 percent chance the Fed will increase its target for overnight bank loans to 0.5 percent by March. Policy makers reduced the target to a range of zero to 0.25 percent in December. To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.

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