By Theresa Barraclough Dec. 28 (Bloomberg) -- Treasuries declined, pushing 10- year yields to the highest level in more than four months, as investors bet the U.S. recovery will fuel inflation and reduce demand for debt at auctions this week. The difference in yields between 2- and 10-year notes was near the widest ever before reports this week that economists said will show declines in U.S. home prices eased in October and consumer confidence climbed this month. The Treasury will sell $44 billion in two-year notes today in the first of three auctions this week totaling a record-tying $118 billion. “Some market participants may be focusing on the housing data, which is forecast to show a six-month consecutive pick- up,” said Akira Takei, a manager in the international bond investment department in Tokyo at Mizuho Asset Management Co., a unit of Japan’s second-largest bank. “At first glance the economy looks OK. The two-year auction will hopefully be better than the previous sale as the yield has risen.” Benchmark 10-year yields rose four basis points, or 0.04 percentage point, to 3.84 percent at 6:03 a.m. in London, according to BGCantor Market Data. It earlier touched 3.85 percent, the highest yield since Aug. 10. The 3.375 percent security due November 2019 fell 10/32, or $3.13 cents per $1,000 face amount, to 96 5/32. Two-year notes yielded 0.98 percent, or 2.86 percentage points below 10-year rates. The spread, known as the yield curve, widened to a record 2.88 percentage points on Dec. 22. Auction Demand The previous record spread of 2.81 percentage points was set on June 5, when Treasuries plunged after a government report showed the smallest decline in U.S. payrolls in eight months. Ten-year note yields touched 4 percent the following week, the highest level in 2009. The last sale of two-year notes in November drew a high yield of 0.802 percent, the lowest ever, and attracted bids for 3.16 times the amount on offer, compared with a bid-to-cover ratio of 3.63 times at the October sale. The two-year security to be sold today yielded 1.03 percent in pre-auction trading. The U.S. will also sell $42 billion in five-year debt tomorrow and $32 billion in seven-year securities on Dec. 30. The five-year sale and seven-year offering equal the all-time highest issues of the securities set last month. “Fiscal worries are also very much present in the U.S., and higher U.S. yields are also a reflection of such concerns,” said Sebastien Barbe, a Hong Kong-based strategist at Calyon. President Barack Obama is borrowing unprecedented amounts for spending programs. U.S. marketable debt increased to a record $7.17 trillion in November from $5.80 trillion at the end of last year. Economic Data Property values in 20 metropolitan areas fell 7.1 percent in October from a year earlier, the smallest 12-month drop since 2007, according to the median forecast of economists surveyed by Bloomberg before a Dec. 29 report from S&P/Case- Shiller. The New York-based Conference Board’s consumer confidence index rose to 53 from 49.5 in November, according to a separate survey. The measure reached a record-low 25.3 in February. The gap between yields on Treasuries and Treasury Inflation Protected Securities, or TIPS, due in 10 years, a measure of the outlook for consumer prices, climbed to 2.38 percentage points on Dec. 25, near the most since July 2008. It traded at 2.37 percentage points today. Holders of U.S. Treasuries of all maturities have lost 3.6 percent this year, according to Bank of America Merrill Lynch indexes. Biggest Since 1999 Yields on benchmark 10-year notes will climb to 5.5 percent, according to David Greenlaw, chief fixed-income economist at Morgan Stanley in New York. The surge will push interest rates on 30-year fixed mortgages to 7.5 percent to 8 percent, almost the highest in a decade, Greenlaw said. Investors are demanding higher returns on government debt, boosting rates this month by the most since January, on concern President Barack Obama’s attempt to revive economic growth with record spending will keep the deficit at $1 trillion. Rising borrowing costs risk jeopardizing a recovery from a plunge in the residential mortgage market that led to the worst global recession in six decades. “When you take these kinds of aggressive policy actions to prevent a depression, you have to clean up after yourself,” Greenlaw said in a telephone interview. “Market signals will ultimately spur some policy action but I’m not naive enough to think it will be a very pleasant environment.” An investor survey showed fund managers remained bearish on Treasuries. Ried Thunberg’s index measuring the outlook through the end of March was unchanged at 43 from last week. A figure below 50 shows investors expect prices to fall. The company, based in Jersey City, New Jersey, interviewed 22 fund managers controlling $1.301 trillion. To contact the reporter on this story: Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net

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