By Theresa Barraclough Dec. 31 (Bloomberg) -- Treasury futures fell with U.S. government bonds poised to post the worst annual performance among Group of Seven nations as the U.S. borrowed unprecedented amounts to help spur a recovery from recession. U.S. securities are headed for the worst year in at least three decades, with 10-year yields near the highest level in four months before a Labor Department report next week that will probably show companies this month stopped cutting workers for the first time in two years. U.S. government securities have fallen 3.5 percent this year, according to Bank of America Merrill Lynch indexes, the biggest slide since 1978. “Yields are likely to be lifted by the Treasury’s large funding needs, poor valuations, a desire to invest in riskier assets and the Federal Reserve’s withdrawal of liquidity,” 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. “The cycle of improved economic growth will lift yields in the medium term.” The yield on 10-year futures contracts for March delivery traded at 4.07 percent as of 12:40 p.m. in Tokyo, based on electronic transactions at the Chicago Board of Trade. The price fell 1/8, or $1.25 per $1,000 face amount, to 115 3/8. The yield on the benchmark 10-year note climbed to as high as 3.82 percent yesterday, near 3.86 percent reached Dec. 29, the highest since Aug. 10, according to BGCantor Market Data. The yield has increased 1.58 percentage points this year. The Securities Industry and Financial Markets Association recommended that trading of cash Treasuries close in Japan today for a holiday. Treasuries should trade as usual in London and shut at 2 p.m. New York time for New Year’s Eve, according to the group. All markets should be closed for New Year’s Day. Fiscal Expansion Treasuries fell the most this year among G-7 countries, followed by U.K. gilts, which lost 1.7 percent and Canadian debt’s 1.5 percent slump, Merrill indexes show. Holders of Italian debt gained the most, adding 8.1 percent. 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. “Massive government intervention through conventional and unconventional means restored the animal spirits of the market,” said Colin Lundgren, head of institutional fixed income for RiverSource Institutional Advisors in Minneapolis, which manages $93 billion in fixed-income. “The likely loser in all this is Treasuries.” The U.S. sold $32 billion of seven-year securities yesterday, the last of three note offerings this week totaling a record-tying $118 billion. Yield Curve The so-called Treasury yield curve, a barometer of the health of the U.S. economy, widened to a record earlier this month as investors bet an accelerating recovery will fuel inflation and hurt demand for the unprecedented sales of government debt. The gap between U.S. 2- and 10-year yields widened to a record 2.88 percentage points on Dec. 22, from 1.45 percentage points at the beginning of the year. The spread was at 2.71 percentage points yesterday. Payrolls were unchanged in December, after falling 11,000 in November, according to the median estimate of economists in a Bloomberg News Survey before the report on Jan. 8. A separate report next week is likely to show manufacturing in the U.S. expanded last month. The Institute for Supply Management’s manufacturing index climbed to 54.0 in December from 53.6 in November, according to a Bloomberg News survey of economists. Readings above 50 signal expansion. Ten-year Treasury yields are likely to climb to 3.97 percent by the end of 2010 as the economic recovery gains momentum, according to analysts and economists surveyed by Bloomberg. Inflation Fed Chairman Ben S. Bernanke has cited a tame inflation outlook as a reason for keeping the target interest rate for overnight loans between banks at a record low zero to 0.25 percent. Treasury Inflation Protected Securities, or TIPS, a gauge of trader expectations for consumer prices, show the improving economy may change sentiment and spark further bond declines. The gap between yields on Treasuries and TIPS due in 10 years, a measure of the outlook for consumer prices, expanded to 2.43 percentage points Dec. 29, the widest since July 2008. It was 2.39 percentage points today. Holders of U.S. debt have made a return of 81 percent over the past decade, according to the Bank of America Merrill Lynch indexes. That compares with an 8 percent loss for the Standard & Poor’s 500 Total Return Index. To contact the reporter on this story: Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net

Source