By Paul Dobson and Wes Goodman Dec. 11 (Bloomberg) -- Treasuries fell, with 10-year notes headed for a second week of declines, as stocks rose and traders speculated a report will show U.S. retail sales increased for the third time in four months. The yield on the 10-year note traded within 1 basis points of its highest level in a month as the MSCI World Index climbed 0.5 percent after Chinese industrial production increased more than economists forecast. The difference in yield between two- and 30-year securities widened yesterday to the most since at least 1980 as investors bet the Federal Reserve will keep interest rates lower for longer, while the government sells more longer-dated debt. “There’s a recovery of risk appetite with Asian performing better,” said Christoph Rieger, co-head of fixed-income strategy in Frankfurt at Commerzbank AG. As a result, “yields are back up,” he said. The 10-year note yield climbed two basis points to 3.51 percent at 7:20 a.m. in New York, according to BGCantor Market Data, after earlier advancing to 3.52 percent, the highest level since Nov. 9. The 3.375 percent security due November 2019 fell 5/32, or $1.56 per $1,000 face amount, to 98 27/32. Thirty-year bonds yielded 4.49 percent, 371 basis points more than the two-year security. The spread reached 374 basis points yesterday after averaging 132 basis points over the past five years. U.S. Retailers Treasuries declined this month amid increasing signs the economic recovery is taking hold. Two-year notes fell the most since August on Dec. 4, after data showed the U.S. economy lost fewer jobs than forecast last month and the unemployment rate declined. A government report today will show sales at U.S. retailers climbed 0.6 percent in November after a 1.4 percent gain in October, according to the median estimate of 79 economists surveyed by Bloomberg News. The Reuters/University of Michigan preliminary index of consumer sentiment for December probably rose to 68.8 from a final reading of 67.4 a month earlier, according to a separate survey. Chinese factory output climbed 19.2 percent last month from a year earlier, the statistics bureau said in Beijing, more than the 18.2 percent median estimate in a Bloomberg News survey. The U.S. “economy looks as if it is recovering and will see slow growth over the next year with a certain degree of risk aversion in place,” said Marius Daheim, a senior fixed-income strategist in Munich at Bayerische Landesbank, Germany’s second- largest state-owned bank. Record Debt U.S. officials said last month they will issue more long- term debt and reduce sales of bills and two- and three-year notes as President Barack Obama borrows record amounts to maintain economic growth. The country’s marketable debt rose to $7.17 trillion in November, government figures show. The yield on 30-year bonds slipped 2 basis points today after rising the past two days, following a $13 billion sale of the securities yesterday that drew lower-than-forecast demand. The bonds were sold at a yield of 4.52 percent, compared with a forecast of 4.483 percent in a Bloomberg News survey of five of the primary dealers. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.45, compared with an average of 2.38 at the last 10 auctions. “Thirty-year yields are now at four-month highs,” Commerbank’s Rieger said. “The auction was anything but spectacular.” Steeper Curve Historically, a steeper yield curve reflects diminishing demand from investors anticipating inflation. The spread between yields on 10-year notes and Treasury Inflation Protected Securities, or TIPS, a gauge of trader expectations for consumer prices, widened 1 basis point to 214 basis points. It was at almost zero in December 2008. The U.S. economy will grow 3 percent in the fourth quarter and 2.7 percent in the first three months of 2010, a Bloomberg survey of banks and securities companies shows. “A steep curve seems appropriate,” said Daheim. U.S. policy makers “will be very careful not to raise market expectations that things are getting better very quickly” when they meet next week, he said. “A flatter curve is the last thing they would want.” Moody’s Investors Service said it has no plans to lower its top debt ratings on the U.S. and the U.K. “The outlook is stable” for the two countries, Moody’s Senior Vice President Tom Byrne said in an interview in Singapore. Byrne was citing comments by Steven Hess, vice president and senior credit officer of the sovereign ratings group for the company, made in a teleconference. Moody’s this week said the U.S. and the U.K. may “test the Aaa boundaries” as their public finances are worsening in the wake of the global financial crisis. To contact the reporters on this story: Paul Dobson in London at pdobson2@bloomberg.netWes Goodman in Singapore at wgoodman@bloomberg.net;

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