By Susanne Walker and Anchalee Worrachate Dec. 14 (Bloomberg) -- Treasuries were little changed, with 10-year notes snapping three days of losses, as stocks gained after Abu Dhabi provided $10 billion to Dubai World to help with debt payments. Treasury 10-year note yields held near a three-month high set on Dec. 11 before the Federal Open Market Committee begins its two-day meeting on interest rates and the economy tomorrow. The yield gap between Treasury 2-year notes and 30-year bonds last week reached the widest since at least 1980 amid lower- than-forecast demand for the $74 billion in notes and bonds auctioned in the week. “A correction is in order,” said John Spinello, chief technical strategist in New York at Jefferies Group Inc., one of 18 primary dealers that trade with the Federal Reserve. “We are seeing some consolidation from longer-term losses last week. We have no supply and we will be seeing better buying for those who need duration.” The yield on the benchmark 10-year Treasury dropped one basis point, or 0.01 percentage point, to 3.54 percent as of 8:39 a.m. in New York, according to BGCantor Market Data. The yield touched 3.58 percent on Friday, the highest level since Aug. 24. The 3.375 percent security due in November 2019 rose 1/32, or 31 cents per $1,000 face amount, to 98 19/32. The yield spread between two- and 10-year notes was at 2.73 percentage points, down from 2.75 percentage points at the end of last week, the highest since June 4. ‘Oversold Territory’ “Momentum studies for long duration Treasuries are now into oversold territory,” William O’Donnell, U.S. government bond strategist at primary dealer RBS Securities Inc. Stamford, Connecticut, wrote in a note to clients. “We’re now in the process of building a base for the market and the curve. Portfolios should now shift to a buy-dip mentality and use approaches to major support, 3.58 percent to 3.64 percent in 10 years, and 4.55 percent to 4.60 percent in 30-years, to get long the market.” A long position is a bet the price of an asset will rise. Futures on the Standard & Poor’s 500 Index rose 0.6 percent. Abu Dhabi’s decision to aid Dubai helped limit further gains for U.S. bonds, according to David Keeble, the head of fixed-income strategy in London at Calyon, the investment banking arm of Credit Agricole SA. Futures Traders “There would have been blood on the floor without the bailout,” Keeble said. Concern that Greece and Dubai wouldn’t be able to meet their commitments hasn’t helped Treasuries turn around what Bank of America’s Merrill Lynch indexes show is a 2.5 percent decline this year. Government securities tumbled as the U.S. economy climbed back from its steepest recession since the 1930s and investors sought higher-yielding assets. U.S. corporate bonds rallied 26 percent. Futures traders are reducing bets for gains in two-year Treasuries as Fed officials meet this week amid signs the economic recovery is lifting the labor market from its worst slump since before World War II. Hedge-fund managers and other large speculators cut so- called net-long positions in two-year note futures by 4.2 percent, the most in five weeks. The contracts dropped to 204,891 in the period ended Dec. 8 from the record high of 221,816 on Nov. 10, according to data compiled by the U.S. Commodity Futures Trading Commission in Washington. More Bearish All 91 economists in a survey by Bloomberg News said the Fed will keep its target interest rate for overnight loans between banks near zero at this week’s meeting. U.S. industrial production rose for a fifth month in November, based on the median forecast in a Bloomberg News survey of economists before the Federal Reserve reports the figure tomorrow. A Labor Department report tomorrow will show producer prices increased, a separate Bloomberg survey shows. International buying of U.S. financial assets quickened in October, economists said before the Treasury Department reports the figure tomorrow. Net purchases of long-term notes, bonds and stocks rose to $42.3 billion from $40.7 billion in September, another Bloomberg survey showed. A survey of investors by Ried, Thunberg & Co. shows fund managers became more bearish on Treasuries. The company’s index measuring investor sentiment toward government debt through the end of June fell to 40 for the seven days ended Dec. 11 from 41 the previous week. Readings below 50 show investors expect prices to fall. The economic analysis company in Jersey City, New Jersey, surveyed 25 fund managers controlling $1.41 trillion. Japanese Bonds Nowhere are yields as low as in Japan’s debt market and nowhere are returns higher as Prime Minister Yukio Hatoyama’s government fails to stop deflation. The combination of the fastest drop in consumer prices in five decades and the yen trading near a 14-year high turned Japanese government bonds into the past month’s best performers among the 26 markets tracked by Bloomberg and the European Federation of Financial Analysts Societies. The debt returned 3.6 percent in dollar terms and 5.6 percent in euros. So-called JGBs rose 0.83 percent this year in local currency. Deflation, or a persistent decline in consumer prices, is sparking demand even as Hatoyama boosts borrowing to a record 53.5 trillion yen ($605 billion) in the year ending March 2010 to pay for fiscal stimulus. Japanese 10-year notes yield 1.295 percent, lower than in the U.S., U.K. and Germany, for so-called real yields of 3.80 percent after accounting for deflation. The comparable rate in the U.S. is 3.74 percent. To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net; Anchalee Worrachate in London at Aworrachate@bloomberg.net.

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