By Patrick Chu and Rocky Swift Dec. 22 (Bloomberg) -- Treasuries fell, pushing 10-year yields to the highest level in four months, on prospects U.S. economic reports will show a sustained recovery. The yen weakened after the Bank of Japan said it will fight deflation by keeping interest rates near zero. Asian technology stocks rose. The benchmark 10-year note yield rose five basis points, or 0.05 percentage point, to 3.72 percent, the highest since Aug. 13, as of 5:05 p.m. in Tokyo, according to BGCantor Market Data. The yen declined to a six-week low of 91.48 per dollar. The MSCI Asia Pacific Index gained 1 percent to 118.02. China stocks plunged after a central bank official emphasized the use of bank reserve requirements in controlling asset bubbles. The Dow Jones Stoxx 600 rose 0.2 percent to 250.07 at 8:05 a.m. in London. The yield curve, the gap between shorter- and longer-term U.S. Treasuries, widened to a record as investors bet an accelerating recovery in the world’s largest economy will feed inflation and hurt demand for new government debt. Separately, Bank of Japan Governor Masaaki Shirakawa said last night the central bank will “persistently” keep rates at “virtually zero” to combat deflation, fueling a drop in the yen. “We’re seeing bond yields push up, offering support to the U.S. dollar, and backed by stronger economic data as well,” said Mike Jones, a currency strategist at Bank of New Zealand Ltd. in Wellington. The central bank will aim “to supply ample liquidity and maintain stability within the financial system,” Shirakawa said in a TV Tokyo interview. “If it is deemed necessary to achieve that, we are always prepared to act swiftly and decisively.” The yield differential between 10-year U.S. and Japanese debt expanded to 2.45 percentage points today, the widest in more than a year, according to data compiled by Bloomberg. The gap has swelled from 1.02 percentage points last year. Yield Curve Widens The difference between 2- and 10-year Treasury note yields increased to 285 basis points today. It rose from 145 basis points at the beginning of the year, with the Federal Reserve anchoring its target rate at virtually zero and the U.S. extending the average maturity of its debt. U.S. personal spending probably rose 0.7 percent in November for a second month, according to the median estimate of economists in a Bloomberg survey before the Commerce Department report due tomorrow. Combined sales of new and existing homes last month may have reached the highest level since May 2007, other figures may show. “With the U.S. economy beginning to see a self- sustained recovery, people now feel there’s increased likelihood for a rate hike,” said Yuji Kameoka, senior economist in Tokyo at the Daiwa Institute of Research Ltd. “The dollar is now entering a rising trend.” Rate Expectations Futures trading in Chicago indicated a 46 percent chance that the Fed will increase its target rate for overnight lending between banks, currently between zero and 0.25 percent, by at least a quarter-percentage point by the June meeting, up from a 32 percent likelihood a month ago. Asian technology stocks rose after Barclays Capital lifted its rating on Intel Corp. to “overweight,” citing “seemingly solid end market conditions” in a report to clients. Toshiba Corp., which the Nikkei newspaper reported will spend up to 100 billion yen ($1.1 billion) on a NAND flash memory plant, led hardware makers higher in Tokyo, adding 4.6 percent to 518 yen. NEC Corp. rose 3.5 percent to 240 yen. Megachips Corp., a supplier of chips to Nintendo Co., added 2.9 percent to 1,307 yen. Intel rose 2.3 percent to $20.09 in U.S. trading. Japanese Exporters Climb The weaker yen helped Japanese exporters. Toyota Motor Corp., the world’s biggest carmaker which gets 31 percent of its revenue in North America, advanced 2.2 percent to 3,800 yen. Sony Corp., Japan’s biggest exporter of televisions, gained 2.7 percent. The Nikkei 225 Index gained 1.9 percent to 10,378.03. Aluminum Corp. of China Ltd. added 1.6 percent after Morgan Stanley analyst Mark Liinamaa predicted prices for the metal could rise to $1.11 a pound. He boosted the stock rating of Alcoa Inc., which soared 7.9 percent in U.S. trading yesterday. Alumina Ltd. rose 3.5 percent to A$1.775. The upgrades on Alcoa and Intel shares helped the Standard & Poor’s 500 Stock Index gain 1 percent to 1,114.05 in New York. Futures on the index rose 0.3 percent in Asia. China’s stocks dived, making the benchmark index the world’s worst performer, on concern the government will step up measures to prevent asset bubbles. Industrial and Commercial Bank, the country’s biggest lender, fell 1.4 percent to 5.07 yuan, while China Construction Bank Corp. dropped 1.7 percent to 5.74 yuan. Reserve Requirements People’s Bank of China Governor Zhou Xiaochuan said today reserve requirements for lenders remain an important tool, fueling speculation they may be increased. Poly Real Estate Group Co., the second-largest developer by market value, slid 2.8 percent. “The policy front is still the biggest risk to the property industry,” said Zheng Tuo, president of Good Hope Equity Investment Co. in Shanghai. “Given the importance of property to China’s economy, investors are wondering if economic growth may be impacted next year.” The Shanghai Composite Index lost 72.45, or 2.3 percent, to 3,050.52 at the close, the lowest since Oct. 30. The measure has dropped 4.5 percent this month as the government increased down payments on land purchases and a flood of share sales diverted funds from equities. The CSI 300 Index, measuring exchanges in Shanghai and Shenzhen, fell 2.7 percent to 3,305.54. Yuan forwards strengthened the most in nine months today after Zhou also highlighted the importance of changes in the country’s international balance of payments, saying that they directly affect money supply and inflation. Yuan Forwards Twelve-month non-deliverable forwards climbed 0.6 percent to 6.6605 per dollar as of 3 p.m. in Hong Kong, indicating a 2.5 percent advance in one year from the spot rate of 6.8291, according to data compiled by Bloomberg. China has kept its currency effectively pegged to the dollar since July last year to help exporters weather the global financial crisis. Crude oil was little changed in New York after declining amid a stronger dollar, which reduces demand for commodities. Oil fell 1.2 percent yesterday after the U.S. currency rebounded. The Organization of Petroleum Exporting Countries, which supplies 40 percent of the world’s oil, will make “no changes” in production quotas when it meets today in Angola, Saudi Oil Minister Ali al-Naimi said yesterday. Crude oil for February delivery traded at $73.80, down 8 cents, in electronic trading on the New York Mercantile Exchange in Asia. The January contract, which expired at the close of floor trading yesterday, dropped 89 cents to $72.47 a barrel. Prices are up about 65 percent this year. Credit Default Swaps The cost to protect Asian company and government bonds from non-payment fell, according to the Markit iTraxx Asia index of credit-default swaps on 50 investment-grade borrowers outside Japan, matching its lowest level this year. The index dropped 2 basis points to 96.5 basis points, Deutsche Bank AG prices show, after closing at 96.3 basis points on Oct. 15, according to CMA DataVision in New York. Credit-default swap indexes are benchmarks for protecting bonds against default and traders use them to speculate on credit quality. An increase suggests deteriorating perceptions of credit quality and a drop shows improvement. The swap contracts pay the buyer face value in exchange for the underlying securities if a borrower fails meet its debt agreements. A basis point is 0.01 percentage point. To contact the reporters on this story: Patrick Chu in Tokyo at pachu@bloomberg.net.

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