By Cordell Eddings Dec. 18 (Bloomberg) -- Treasuries fell as an increase in crude oil prices fueled speculation inflation will accelerate in coming months, denting demand for fixed-rate assets. Ten-year note yields declined the most since October yesterday after a report showed more Americans than anticipated filed first-time claims for jobless benefits. Oil rose in New York after reports that Iranian forces entered Iraqi territory and surrounded an oil well. The yield spread between 10-year notes and Treasury Inflation Protected Securities, a gauge for price-growth expectations, was at 229 basis points, near the most in 16 months. “Oil prices have spiked some as a result of political intrigue, which leads to inflation expectation concerns,” said Eric Lascelles, chief rates strategist and economist at Toronto- Dominion Bank in Toronto. “The Fed earlier this week indicated that they weren’t concerned about inflation, but you still had inflation data in general coming in higher than expected.” The yield on the 10-year note rose seven basis points to 3.54 percent at 4:27 p.m. in New York, according to BGCantor Market Data. The 3.375 percent security due November 2019 fell 17/32, or $5.31 cents per $1,000 face amount, to 98 19/32. The yield was little changed on the week. “Buy any dips in longer Treasury paper and use any steepening of the curve to extend into 10s and 30s,” said William O’Donnell, U.S. government bond strategist at RBS Securities Inc. in Stamford, Connecticut, one of 18 primary dealers that trade with the Fed. “The balance of technical risks have finally shifted in favor of the back end.” Positioned Tanks Iranian forces yesterday entered Iraqi territory at dawn and occupied an oil well in the East Maysan oil field, Zafer Nazmi, a border guard general, said earlier today. The Iranian forces positioned tanks around the well in the al-Fakah region, 450 kilometers (280 miles) south of Baghdad. The two neighbors have disputed the border of southeast Iraq for decades. Iraq summoned the Iranian ambassador to Baghdad and has begun “diplomatic steps,” to resolve the situation, Iraqi government spokesman Ali Al-Dabbagh said in a statement after a meeting of Iraq’s National Security Council. Crude oil for January delivery rose as much as $2.04, or 2.8 percent, to $74.69 a barrel on the New York Mercantile Exchange. Treasury 10-year notes are headed for their first weekly advance in December, as the Federal Reserve pledged to keep interest rates near zero amid concern the economic recovery will stall. Ten-year note yields fell as much as 13 basis points yesterday, the most since Oct. 1, after a report showed more Americans than anticipated filed first-time claims for jobless benefits last week. ‘Isn’t Over’ “We have an improving job picture in some areas and then get bumped up in the claims number,” said David Ader, the head of government bond strategy at Stamford, Connecticut-based CRT Capital Group LLC. “The reality is prices are changing more than any underlying facts.” Treasury 10-year note yields touched their highest levels since August on Dec. 15 after a report showed a 1.8 percent increase in prices paid to factories, farmers and other producers, more than twice as large as anticipated. The U.S. is still in a recession and home prices may resume declines, Harvard University economics professor Martin Feldstein said. “The recession isn’t over,” Feldstein said yesterday in an interview on Bloomberg Radio in New York. “It will be a while before we have enough information to know if the recession ended.” Fed officials said on Dec. 16 that the U.S. economy isn’t improving enough for them to raise interest rates from a record low and that rates would remain ‘exceptionally low” for an “extended period.” Cash Boost The U.S. economy will grow 3 percent in the fourth quarter and slow to 2.65 percent in the first three months of 2010, according to a Bloomberg survey of economists. It expanded 2.8 percent in the third quarter of 2009, following the steepest U.S. economic recession since the 1930s. Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., cut holdings of government debt and boosted cash to the most since Lehman Brothers Holdings Inc. collapsed in September 2008. Gross increased cash in the $199.4 billion Total Return Fund to 7 percent in November, from a negative 7 percent in October, according to Pimco’s 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. To contact the reporters on this story: Cordell Eddings in New York at ceddings@bloomberg.net.

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