By Theresa Barraclough Dec. 7 (Bloomberg) -- Treasuries were little changed, after completing the worst week in four months, as the U.S. prepared to sell $74 billion in notes and bonds this week. Treasury two-year note yields climbed to the highest level in more than three weeks on speculation Federal Reserve Chairman Ben S. Bernanke will today reiterate that the economy had improved “modestly.” Traders added to bets policy makers will start raising interest rates after a Labor Department report last week showed the jobless rate in the world’s largest economy unexpectedly declined last month. “The bearish trend will continue this week,” said Yasutoshi Nagai, chief economist at Daiwa Securities SMBC Co. in Tokyo, part of Japan’s second-largest brokerage. “The supply is a concern this week, especially after the stronger employment data, which means that the possibility of a stronger economic rebound has increased.” The benchmark 10-year note yielded 3.47 percent as of 6:27 a.m. in London, according to BGCantor Market Data. The 3.375 percent security due November 2019 traded at 99 6/32. The yield reached 3.51 percent on Dec. 4, the most since Nov. 12. The two-year yield climbed to as high as 0.86 percent today, the highest since Nov. 10. U.S. government bonds lost 2.4 percent this year after returning 14 percent in 2008, the most this decade, according to indexes compiled by Bank of America’s Merrill Lynch unit. The Treasury will auction $40 billion of 3-year notes tomorrow, $21 billion of 10-year securities on Dec. 9 and $13 billion of 30-year bonds on Dec. 10. Fed Policy Eight of the Fed’s districts “indicated some pickup in activity or improvement in conditions,” while the other four said conditions were little changed or mixed, the central bank said in its Beige Book business survey on Dec. 2, published two weeks before officials meet to set monetary policy. Traders boosted wagers the central bank will begin lifting its target rate for overnight loans next year. Federal-funds futures contracts on the Chicago Board of Trade show a 16 percent probability the Fed will increase the target rate to at least 0.5 percent by March, up from 8.3 percent odds a week ago. For a similar increase at the June meeting of the Federal Open Market Committee, the probability rose to 54 percent from 31 percent a week ago. The Fed on Nov. 4 repeated it will keep interest rates near zero for “an extended period” and specified for the first time that policy will stay unchanged as long as inflation expectations are stable and unemployment fails to decline. Jobless Rate Labor Department reports on Dec. 4 showed the unemployment rate fell to 10 percent and employers cut 11,000 jobs in November, compared with a median forecast of 125,000 positions in a Bloomberg News survey of economists. A survey of investors by Ried, Thunberg & Co. showed fund managers turned more bearish on Treasuries. The company’s index measuring the outlook through the end of March fell to 42 after the payrolls data, from 43 before. A figure below 50 shows investors expect prices to fall. The company, based in Jersey City, New Jersey, interviewed 25 fund managers controlling $1.33 trillion. Higher Treasury yields have pushed up rates on Fannie Mae and Freddie Mac mortgage securities to the highest in almost a month. The yield on Washington-based Fannie Mae’s current-coupon 30-year fixed-rate mortgage bonds climbed to 4.25 percent on Dec. 4 in New York, the highest since Nov. 9, according to data compiled by Bloomberg. U.K. Gilts The world’s biggest bond investors say U.K. gilts may prove more lucrative than Treasuries for a second straight year in 2010 as purchases by banks offset record borrowing by Chancellor of the Exchequer Alistair Darling. Gilts have handed investors a return of 0.35 percent so far this year, compared to a loss for Treasury holders. BlackRock Inc., Charteris Portfolio Managers and Pacific Investment Management Co., which together oversee $2.4 trillion, are buying gilts on speculation the Bank of England will be among the last central banks to raise interest rates as economies around the world recover from the first global recession since World War II. Strategists are slashing forecasts for U.K. 10-year bond yields, even as they boost estimates for U.S. and German rates, according to data compiled by Bloomberg. That may support demand as the government, which must call an election by June, increases borrowing 94 percent to 175 billion pounds ($288 billion) in the year ending March 31. “It sounds a big, daunting number, but I think when push comes to shove it would be quite easy to finance,” said Ian Williams, the chief executive officer of Charteris, which runs the top-performing fund for U.K. government bonds, according to data compiled by research firm Lipper. “The Bank of England has bought so many gilts back from the market that, in a recession, bizarrely, you could have a shortage.” To contact the reporter on this story: Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net.

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