By Theresa Barraclough and Keith Jenkins Feb. 18 (Bloomberg) -- Treasury 10-year yields were near the highest in five weeks before a government report that economists said will show producer-price inflation accelerated last month, damping the allure of government debt. U.S. notes fell yesterday after minutes of the Federal Reserve’s January meeting showed policy makers boosted forecasts for economic growth and inflation and discussed starting sales of assets in the “near future.” The U.S. will today announce $127 billion in note and bond sales next week, according to the average forecast of eight primary dealers that are required to bid on the auctions. “The Fed will reduce its balance sheet and may start selling assets soon, which will put pressure on longer-dated yields,” said Orlando Green, an interest-rate strategist at Credit Agricole Corporate and Investment Bank in London. The 10-year note yielded 3.73 percent at 7:23 a.m. in New York, according to data compiled by Bloomberg. The 3.625 percent note due February 2020 fell less than 1/32, or 31 cents per $1,000 face amount, to 99 3/32. The yield climbed to 3.76 percent yesterday, matching the highest since Jan. 14. The 2- year note rose was little changed to yield 0.85 percent. The spread between two-and 10-year yields, known as the yield curve, was as much as 290 basis points, or 2.9 percentage points, tying the record set on Jan. 11. Spread Widens “The curve is very steep and close to significant levels,” Green said. “The short end is anchored by expectations that the Fed will leave interest rates low for a prolonged period. The curve may steepen further should the Fed unwind some of its holdings.” The yield spread may widen to more than 300 basis points, MacNeil Curry, a fixed-income technical strategist at Barclays Plc wrote in a note to clients today. A sustained break above a technical resistance level around 287 to 289 basis points “may push the spread towards 310 basis points in the next month,” Curry said in a telephone interview from London. A resistance level is where orders to sell a security and its related instruments may be grouped. The stronger the resistance, the more buying is needed to advance through that level. The Treasury will announce it will sell $44 billion in 2- year securities, $42 billion in 5-year debt, $32 billion in 7- year notes and $9 billion in 30-year Treasury Inflation Protected Securities, or TIPS, according to the average forecast of the eight primary dealers. The TIPS auction is scheduled for Feb. 22, followed on succeeding days by the 2-, 5- and 7-year sales. Asset Sales Officials unanimously agreed the central bank’s $2.26 trillion balance sheet will need to shrink “substantially over time” and return its holdings to just Treasuries, according to minutes of the Fed’s Jan. 26-27 meeting released yesterday. Several officials pushed to begin asset sales “to ensure that the Federal Reserve’s balance sheet shrinks more quickly and in a more predictable manner than could be achieved solely by redeeming maturing securities,” the minutes showed. The U.S. economy will grow between 2.8 percent and 3.5 percent this year, the Fed said, compared with 2.5 percent to 3.5 percent in its November forecast. Prices, excluding food and energy costs, will rise by 1.1 percent to 1.7 percent this year, compared with an earlier estimate of 1 percent to 1.5 percent. Producer prices climbed 0.8 percent in January, after increasing 0.4 percent the previous month, according to economists surveyed by Bloomberg News before today’s Labor Department report. Economic Data The index of U.S. leading indicators probably rose in January for a 10th straight month, pointing to an economy that will keep expanding through the first half of this year, economists said before a report today. The Conference Board’s gauge of the outlook for the next three to six months rose 0.5 percent after climbing 1.1 percent in December, according to the median forecast of 56 economists surveyed by Bloomberg News. Manufacturing in the Philadelphia region probably accelerated in February, pointing to a factory rebound that’s helping lead the economy out of the deepest recession since World War II. The Federal Reserve Bank of Philadelphia’s general economic index rose to 17 from a January reading of 15.2, according to the median forecast of 57 economists in a separate Bloomberg News survey. Recovery View “There’s little from the data that’s likely to change the view of economic recovery,” Credit Agricole CIB’s Green said. The spread between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices, was 2.30 percentage points, compared with 1.15 percentage points a year ago. Treasury bulls say bonds are set to rise on speculation a weak labor market will drag on the economic recovery, encouraging investors to seek safer assets. The unemployment rate will average 9.5 percent to 9.7 percent in the fourth quarter, the Fed said yesterday, compared with the forecast for 9.3 percent to 9.7 percent made in November. The jobless rate declined to 9.7 percent last month. Initial jobless claims fell to 438,000 last week, from 440,000 the previous week, according to a Bloomberg survey before today’s Labor Department report. Claims have averaged 357,000 during the past decade. To contact the reporter on this story: Keith Jenkins in London at Kjenkins3@bloomberg.net, or Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net.

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