By Anna Rascouet and 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 Fed is very decisive in communicating that they will put rates on hold and the market is repricing as a consequence,” said Michael Markovic, a senior fixed-income strategist at Credit Suisse Group AG in Zurich. “It looks like they are going for an inflationary policy.” Two-year notes yielded 0.75 percent as of 7:54 a.m. in London, according to BGCantor Market Data. The 1 percent security due 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. Bullard’s comments followed a Nov. 16 speech by Fed Chairman Ben S. Bernanke in which he indicated that the central bank’s extended period of low borrowing costs may be even longer amid economic “headwinds.” The two-year note yield fell 4 basis points that day, the biggest decline this month, while the yield on the 10-year security dropped 9 basis points. Fed Pledge The Fed repeated its pledge at its Nov. 4 meeting to keep borrowing costs at a record low to support the economic revival. 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. 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, down from 32.4 percent a month ago. Policy makers cut the target to a range of zero to 0.25 percent in December. U.S. President Barack Obama said yesterday in an interview with Fox News in Beijing that the U.S. must get the federal deficit under control. If the government continues to pile up debt, “people could lose confidence in the U.S. economy in a way that could actually lead to a double-dip recession,” Obama said. Record Sales The U.S. will 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-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. 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 little changed today at 2.61 percentage points, increasing from 2.43 percentage points a month ago. 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. To contact the reporter on this story: Anna Rascouet in London arascouet@bloomberg.netWes Goodman in Singapore at wgoodman@bloomberg.net.

Source