By Cordell Eddings Jan. 25 (Bloomberg) -- Treasury two-year notes fell for the first time in four days as stocks rose and the U.S. prepared to sell a record-tying $44 billion of the debt tomorrow. The drop pushed the 2-year note’s yield up from a one-month low before tomorrow’s offering, the first of three this week totaling $118 billion. Treasuries declined amid signs Federal Reserve Chairman Ben S. Bernanke is likely to win confirmation for a second term after wavering political support spurred demand for the safest securities last week. “Equities are firmer and Bernanke looks to be in a better situation, taking the bid away from Treasuries,” said Paul Horrmann, a broker in Jersey City, New Jersey, at ICAP Plc, the world’s largest inter-dealer broker. “It looks like we are headed to a higher-rate environment going into supply. This week we should get a lot of clarification between GDP, supply and the Bernanke story.” The two-year note’s yield increased two basis points, or 0.02 percentage point, to 0.81 percent at 11:15 a.m. in New York. The yield touched 0.78 percent on Jan. 22, the lowest level since Dec. 21. The 1 percent security due in December 2011 fell 1/32, or 31 cents per $1,000 face amount, to 100 3/8. U.S. stocks rose, rebounding from the biggest three-day decline since the rally began in March. The Standard & Poor’s 500 Index advanced 0.6 percent. Treasuries gained last week amid speculation President Barack Obama’s bank regulation plans will crimp economic growth and lawmakers raised questions about confirming Bernanke. Marketable Debt Tomorrow’s two-year note sale is followed by a $42 billion of five-year debt the next day and $32 billion of seven-year securities on Jan. 28. The $118 billion total matches President Obama has increased U.S. marketable debt to a record $7.27 trillion to fund spending programs and a federal deficit that rose to $1.4 trillion last year. David Axelrod, one of President Barack Obama’s senior advisers, and Senate Republican leader Mitch McConnell said over the weekend Bernanke will keep his job. Those assurances followed declarations of support from the top two Senate Democrats, Harry Reid and Richard Durbin, who earlier said they were undecided. The Senate plans to vote on the confirmation this week, an aide to Reid said. John McCain, the Republican 2008 presidential nominee, is among senators who oppose Bernanke. Treasuries rallied in the fourth quarter of 2008 as Bernanke cut interest rates to a record low to combat the recession, which triggered $1.74 trillion of losses and writedowns at financial institutions worldwide. Fed Meeting The world’s largest economy expanded at a 4.6 percent pace from October through December, the strongest since the first three months of 2006, according to the median estimate of 74 economists in a Bloomberg News survey. The report from the Commerce Department is due on Jan. 29. Gross domestic product will expand 2.7 percent in the U.S. this year, compared with 1.35 percent in Japan, median analyst estimates compiled by Bloomberg show. Fed policy makers repeated last month a pledge to keep borrowing costs “exceptionally low” for an “extended period.” All 91 economists surveyed by Bloomberg predict the central bank will leave the rate unchanged at its Jan. 26-27 meeting. “The bulk of market attention is expected to be focused on the first estimate of real GDP in the fourth quarter of 2009 and the Federal Reserve’s interest-rate decision,” John Davies, a fixed-income strategist in London at WestLB AG, said today in a note to investors. “The Fed will in all likelihood leave its monetary policy unchanged.” Yield Curve The spread between 2- and 10-year note yields was 2.81 percentage points after reaching a record 2.90 percentage points on Jan. 11. Two-year rates tend to track the Fed’s target for overnight lending because of their shorter maturity. Yields on longer-term bonds are more influenced by inflation and by the size of the government’s debt. January’s rally in Treasuries may prove fleeting as options traders bet on bigger price swings in bonds and waning volatility in stocks for the first time since 2006. Barclays Plc indexes show interest-rate volatility rose from a six-month low in November on speculation borrowing costs will increase as the improving economy allows the Fed to remove the unprecedented cash it pumped into the financial system. At the same time, confidence in the outlook for profits helped push the Chicago Board Options Exchange Volatility Index to an almost two-year low this month. Ried Thunberg ICAP Inc.’s index measuring the outlook for Treasuries through the end of June shows investors became less bearish. The gauge climbed to 43 for the seven days ended Jan. 22 from 40 the week before. A figure less than 50 shows investors expect prices to fall. The company, in Jersey City, New Jersey, interviewed 26 fund managers. To contact the reporters on this story: Cordell Eddings in New York at ceddings@bloomberg.net.

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