By Wes Goodman Dec. 15 (Bloomberg) -- Treasuries were little changed, with yields near the highest level in almost four months, before reports today on factory output and wholesale costs that analysts said will show U.S. economic growth is picking up. The spread between yields on 10-year notes and Treasury Inflation Protected Securities, or TIPS, a gauge of trader expectations for consumer prices, widened to as much as 2.24 percentage points, the most this year based on closing prices. The intraday high was 2.30 percentage points set Dec. 4. “Yields ought to be pushing up early next year as the market comes to terms with the strengthening in the economy,” said Adam Donaldson, Sydney-based head of debt research at Commonwealth Bank of Australia, the nation’s largest lender by market value. The 10-year note yielded 3.54 percent as of 6:40 a.m. in London, according to BGCantor Market Data. The 3.375 percent security due November 2019 traded at 98 19/32. The yield was as high as 3.58 percent on Dec. 11, the most since Aug. 24. Ten-year rates will increase to 3.70 percent by the end of June, according to a Bloomberg News survey of banks and securities companies, with the most recent forecasts given the heaviest weightings. Donaldson predicts they will be 4 percent in the early part of 2010. Yields on 10-year TIPS will rise to 1.80 percent from today’s 1.31 percent, he said. Factory Output Industrial production climbed 0.5 percent in November, quickening from 0.1 percent in October, based on the median forecast in a Bloomberg survey of economists before the Federal Reserve reports the data today. Figures from the Labor Department will show producer prices gained 0.8 percent last month, after a 0.3 percent increase in October, according to a separate Bloomberg survey. Treasuries have fallen 2.5 percent this year, while corporate bonds returned 26 percent, according to indexes compiled by Bank of America’s Merrill Lynch unit. Investors sought higher-yielding assets as the U.S. economy snapped its steepest recession since the 1930s. Economic recovery combined with increasing government debt sales will send yields higher around the world in 2010, wrote analysts at Bank of America Merrill Lynch including Michael Cloherty in New York, in a report distributed yesterday. “We expect a moderate increase in global rates,” the report said. U.S. 10-year yields will rise to 4.25 percent next year, the analysts said. Boosting Sales President Barack Obama has increased U.S. marketable debt to $7.18 trillion, the most ever, as he borrows to sustain growth. The U.K. said on Dec. 9 it will boost gilt sales to a record. Germany said Dec. 13 that it plans to sell an unprecedented amount of debt next year. Treasury 10-year yields will climb to 4.50 percent by the end of next year, economists led by Joseph LaVorgna at Deutsche Bank AG in New York wrote in a research note on Dec. 11. Investors should “scale into” bearish positions starting in the second quarter, the report said. Bank of America and Deutsche Bank are two of the 18 primary dealers, companies required to bid at government debt sales. Treasury bulls say the Fed will keep interest rates at a record low to foster economic growth. The jobless rate of 10 percent is near the 26-year high of 10.2 percent set in October. Fed Chairman Ben S. Bernanke said on Dec. 7 the economy faces “headwinds” and he repeated the central bank’s statement that rates are likely to remain low for an “extended period.” FOMC Meeting The Federal Open Market Committee will announce its latest decision on interest rates tomorrow at the end of a two-day meeting. Fed funds futures contracts on the Chicago Board of Trade show a 100 percent chance the central bank will refrain from raising borrowing costs. “I don’t see yields going much higher,” said Geoff Howie, an economist and broker at MF Global Singapore Ltd., part of the world’s largest broker of exchange-traded futures and options contracts. “It’s all unemployment. The Fed can’t go too early” to a higher-rate policy. Ten-year yields will fall to 3.4 percent by the end of March, he said. U.S. two-year notes fell for a fourth day yesterday, the longest stretch since the four trading days ended Oct. 19, as demand for the safety of U.S. debt waned after Abu Dhabi agreed to bail out Dubai World with $10 billion. ‘Being Fixed’ “We’re seeing an unwind of the flight-to-quality bid,” said Paul Horrmann, a broker in Jersey City, New Jersey, at ICAP Plc, the world’s largest inter-dealer broker. “Things are being fixed that were worrisome.” Abu Dhabi’s pledge allowed Dubai World’s Nakheel real- estate unit to avoid default on $4.1 billion of bond payments that matured yesterday. Treasuries rose last month as Dubai said it was starting talks with its lenders to restructure debt accumulated during the emirate’s six-year real estate boom. International buying of U.S. financial assets slowed in October, economists said before the Treasury Department reports the figure today. Net purchases of long-term notes, bonds and stocks declined to $37.1 billion from $40.7 billion in September, another Bloomberg survey showed. To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.

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