By Theresa Barraclough Jan. 28 (Bloomberg) -- Treasuries declined for a second day before U.S. reports that economists said will show durable goods orders rose in December and fewer Americans sought jobless benefits last week. Ten-year yields climbed to the highest level in a week after Kansas City Fed President Thomas Hoenig dissented from the decision to keep interest rates at a record low for an “extended” period yesterday, a sign the central bank is moving toward raising borrowing costs. Bonds also fell after President Barack Obama called on Congress to pass a package of tax cuts and spending, prompting stocks to extend gains. “For the Fed to move, it depends on the labor market,” said Hideo Shimomura, who helps oversee the equivalent of $56 billion as chief fund investor in Tokyo at Mitsubishi UFJ Asset Management Co., a unit of the world’s biggest bank by assets. “With labor market improvement, people may start wondering about when the Fed will hike.” The yield on the benchmark 10-year note rose three basis points to 3.69 percent as of 2:38 p.m. in Tokyo, according to BGCantor Market Data. The rate is at the highest level since Jan. 20. The 3.375 percent security due November 2019 fell 1/4, or $2.50 per $1,000 face amount, to 97 15/32. Ten-year yields may climb to as high as 3.90 percent by the end of June, Mitsubishi UFJ’s Shimomura said. Durable Goods Bookings for durable goods rose 2 percent last month after dropping 0.7 percent in November, according to the median estimate of economists surveyed by Bloomberg News. The Labor Department will say initial jobless claims fell to 450,000 last week from 482,000 in the prior seven days, a separate Bloomberg News survey showed. Both reports are due for release today. The world’s biggest economy expanded at a 4.6 percent annual rate in the final quarter of last year, according to economists surveyed by Bloomberg. The government will release its advance report on gross domestic product tomorrow. Hoenig “believed that economic and financial conditions had changed sufficiently that the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted,” according to yesterday’s Fed statement. “Hoenig’s dissent was very important,” said Michael Pond, an interest-rate strategist in New York at Barclays Plc, one of 18 primary dealers that trade with the central bank. “It’s the first dissent we’ve seen in quite some time which stokes concerns that this could become a pattern and trend toward a more hawkish stance.” Extended Period Treasury bulls say yields are likely to decline as low levels of inflation allow the Fed to keep borrowing costs down even as they remove special stimulatory measures. “The Fed will continue following a low-interest rate policy for an extended period because of relatively low inflation and capacity utilization,” said Hiromasa Nakamura, a Tokyo-based senior investor at Mizuho Asset Management Co., which oversees $21.1 billion. Ten-year yields will fall to 3.2 percent by the end of March, he said. Should his predictions prove accurate, investors who buy the debt today would make a 4.6 percent return, Bloomberg calculations using horizon analysis shows. The gap between yields on 10-year notes and Treasury Inflation Protected Securities, or TIPS, a gauge of trader expectations for consumer prices, was at 2.36 percentage points today, down from 2.41 percentage points at the end of last year. IMF Outlook The International Monetary Fund said in an update to its Global Financial Stability Report on Jan. 26 that the global financial system remains “fragile.” In a separate report, it said low inflation will allow the world’s central banks to keep down interest rates. Traders saw 52 percent odds that the Fed will leave its target for overnight lending between banks unchanged through June, according to futures on the Chicago Board of Trade. The MSCI Asia Pacific Index of regional shares advanced 1 percent as Obama called for an extension of tax incentives worth $38 billion over this year and next. Many of the steps he outlined repeated initiatives he’s proposed previously. “I liked the initiatives that were about re- industrializing the U.S. to produce jobs and growth,” said Geoff Howie, senior vice president at MF Global Singapore, part of the world’s largest broker of exchange-traded futures and options. “This could see money taken out of the foxhole and buying equities and selling Treasuries.” Obama Speech Obama said the government also must tackle the federal budget deficit, forecast to be $1.35 trillion this year. The government will sell $32 billion in seven-year notes today, the last of three sales this week totaling $118 billion. Today’s auction of seven-year debt follows a $42 billion sale of five-year securities yesterday and a $44 billion offering of two-year notes on Jan. 26. The prior sale of seven-year notes on Dec. 30 drew a high yield of 3.345 percent and attracted bids for 2.72 times the amount on offer, compared with a bid-to-cover ratio of 2.76 at the Nov. 25 auction. The seven-year security to be sold today yielded 3.16 percent in pre-auction trading. To contact the reporter on this story: Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net.

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