By Anchalee Worrachate Dec. 18 (Bloomberg) -- Treasuries fell as gains in commodity prices fuelled speculation inflation will accelerate in coming months, denting demand for fixed-rate assets. The decline trimmed a weekly advance for the 10-year note. Copper rose while oil is poised for its biggest weekly advance since October. Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said Treasuries are overvalued when potential inflation is taken into account. The yield spread between 10-year notes and Treasury Inflation Protected Securities, a gauge for price-growth expectations, rose to 231 basis points this week, the most in 16 months. “There are fundamental reasons why inflation expectations have risen to where they are,” said Peter Chatwell, a fixed- income strategist in London at Calyon. “Yields need to rise to compensate for higher inflation in the future. There’s also an element of profit taking after a rally earlier this week.” The yield on the 10-year note rose 1 basis points to 3.49 percent as of 10:30 a.m. in London, according to BGCantor Market Data. The 3.375 percent security due November 2019 fell 3/32, or 93 cents per $1,000 face amount, to 99 1/31. The yield fell 6 basis points this week, the first decline in December. Treasuries also fell as stocks climbed. Europe’s Dow Jones Stoxx 600 Index rose 0.8 percent, helping lift the MSCI World Index 0.3 percent. Higher Rates Ten-year yields will climb to 4.04 percent at the end of 2010, according to a Bloomberg survey that gives a heavier weighting to the most recent forecasts. Gross cut holdings of government debt and boosted cash to the most since Lehman Brothers Holdings Inc. collapsed in September 2008. Pimco increased cash in the $199.4 billion Total Return Fund’s to 7 percent in November from negative 7 percent in October, according to its Web site. The fund can have a so- called negative position by using derivatives, futures or by shorting. He reduced government-related securities to 51 percent from a five-year high of 63 percent in October. Yields indicate traders are adding to bets that inflation will quicken. “Yields will rise next year,” said Tsutomu Komiya, an investment manager in Tokyo at Daiwa Asset Management Co., which oversees the equivalent of $77 billion. “The U.S. economy will recover and there is a possibility of a rate hike.” Treasuries have handed investors a 1.1 percent loss in December, according to indexes compiled by Bank of America’s Merrill Lynch unit. They are down 2.1 percent this year, heading for their first annual decline in a decade. The Federal Reserve repeated its pledge to keep interest rates “exceptionally low” for “an extended period” and said the economy is strengthening, after its meeting in Washington this week. To contact the reporter on this story: Anchalee Worrachate at aworrachate@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net.

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