By Wes Goodman Jan. 8 (Bloomberg) -- Treasuries fell and traders increased bets on inflation to the most since July 2008 before a U.S. report that economists said will show a 23-month run of job losses ended in December. The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices, widened to 2.46 percentage points yesterday from 0.55 percentage points a year ago. It was 2.45 percentage points today. “We expect higher interest rates” on 10-year notes, said Satoshi Okumoto, a manager at Fukoku Mutual Life Insurance Co. in Tokyo, which has the equivalent of $58.9 billion in assets. “The economic fundamentals are better than expected.” Ten-year note yields rose two basis points to 3.85 percent as of 6:32 a.m. in London, according to data compiled by Bloomberg. The 3.375 percent security due in November 2019 dropped 5/32, or $1.56 per $1,000 face amount, to 96 5/32. Yields increased one basis point over the past five days, for a total of 31 basis points in three weeks. A basis point is 0.01 percentage point. A jobs gain would send the 10-year yield to 4.2 percent this month, said Yasutoshi Nagai, chief economist at Daiwa Securities SMBC Co. in Tokyo, part of Japan’s second-largest brokerage. An investor who bought today would lose 2.6 percent if the forecast proves correct, according to data compiled by Bloomberg. Fukoku Mutual would consider buying 10-year debt if the rate rises past 4 percent, Okumoto said. The rate will advance to 4.03 percent by year-end, a Bloomberg survey of banks and securities companies shows, with the most recent forecasts given the heaviest weightings. Unemployment Payrolls were unchanged in December after falling every month since January 2008, according to the median estimate from economists surveyed by Bloomberg News before the Labor Department reports the figure. The unemployment rate may have held at 10 percent, near the 26-year high of 10.2 percent set in October. Treasury two-year yields climbed 11 basis points on Dec. 4, the most since June, after the Labor Department reported that November payrolls fell by 11,000, compared with the median forecast for a 125,000 decline. The figure caused some investors to increase bets that the Federal Reserve would raise interest rates this year. Two-year yields, which tend to be influenced by forecasts for what the Federal Reserve will do with overnight borrowing costs because of their short maturities, climbed two basis points today to 1.04 percent. Longer-term bonds are more influenced by inflation. Unwinding Stimulus Policy makers are considering how to unwind unprecedented stimulus and emergency credit programs amid signs the U.S. economy is rebounding. Fed Bank of Kansas City President Thomas Hoenig said yesterday the central bank should move “sooner rather than later” to reduce stimulus, with a goal of eventually boosting the benchmark interest rate to “probably between 3.5 and 4.5 percent.” The Fed is currently targeting a range of zero to 0.25 percent for the benchmark interest rate on overnight loans between banks. “Maintaining excessively low interest rates for a lengthy period runs the risk of creating new kinds of asset misallocations, more volatile and higher long-run inflation, and more unemployment -- not today, perhaps, but in the medium- and longer-run,” said Hoenig, who votes on monetary policy decisions this year, in a speech in Kansas City. Regulator Warning U.S. regulators including the Fed warned banks to guard against possible losses from an end to low interest rates. “In the current environment of historically low short- term interest rates, it is important for institutions to have robust processes for measuring and, where necessary, mitigating their exposure to potential increases in interest rates,” said the Federal Financial Institutions Examination Council, which includes the Fed, Federal Deposit Insurance Corp. and other agencies, in a statement yesterday. Supply Concerns The government plans to sell $10 billion in 10-year TIPS on Jan. 11, $40 billion of three-year notes on Jan. 12, $21 billion of 10-year securities on Jan. 13 and $13 billion of 30- year debt on Jan. 14. “There’s some worry about how we absorb the supply, and some are worried about inflation,” said Lawrence Dyer, an interest-rate strategist in New York at HSBC Securities USA Inc., one of the 18 primary dealers that trade directly with the Federal Reserve. “You don’t want to buy cheap bonds that will get cheaper.” Demand for higher returns outside the U.S. government debt market is increasing investors’ appetite for corporate bonds. An index of the securities compiled by Bank of America Corp.’s Merrill Lynch unit yielded 2.70 percentage points more than Treasuries. The spread is the narrowest since November 2007, before the global credit crisis sent corporate bond yields surging the following year. Two-year interest-rate swap spreads were near the least in six years. The difference between the rate to exchange floating- for fixed-interest payments and Treasury yields for two years shrank to 26.4 basis points yesterday. It was 25.56 basis points on Dec. 31, the least since 2003. To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.

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