By Wes Goodman March 8 (Bloomberg) -- Treasuries fell, pushing 10-year yields to the highest level in more than a week, as Asian shares extended a global rally in equities on signs the world economy is improving. Traders added to bets the Federal Reserve will raise interest rates as economists said government data this week will show retail sales are likely to pick up after blizzards kept people home in February. Toyota Asset Management Co. dropped its forecast for a bond-market rally after a March 5 report showed the U.S. lost fewer jobs than economists anticipated. “Treasury yields will rise,” said Masaaki Sugihara, who helps oversee $12 billion in assets as head of foreign debt in Tokyo at Toyota Asset, a unit of the world’s biggest carmaker. “The U.S. economy is improving, and that will continue.” The yield on the benchmark 10-year note climbed 3 basis points to 3.71 percent as of 8:06 a.m. in London, according to BGCantor Market Data. The rate is the highest since Feb. 24. The 3.625 percent security due February 2020 slid 7/32, or $2.19 per $1,000 face amount, to 99 9/32. The MSCI Asia Pacific Index of shares gained 1.9 percent, the most in two weeks, helping curb demand for the relative safety of government debt. MSCI’s World Index climbed 0.5 percent after advancing 3.3 percent last week. Retail sales declined 0.2 percent in February, according to the median estimate of economists surveyed by Bloomberg before Commerce Department figures on March 12. The economy lost 36,000 jobs last month and the unemployment rate was unchanged at 9.7 percent, a government report showed last week. ‘Severe Snowstorms’ “Retail sales likely would have squeaked out a modest gain if not for the severe snowstorms,” said Ryan Sweet, a senior economist at Moody’s Economy.com in West Chester, Pennsylvania. Futures contracts on the CME Group Inc. exchange showed a 43 percent probability that Fed policy makers will raise the target rate for overnight loans between banks by September, up from 32 percent odds a week ago. The Fed’s benchmark has been at a range of zero to 0.25 percent since December 2008. The difference between 2- and 10-year yields shrank as low as 2.73 percentage points on March 5 as rates on shorter maturities climbed faster than those on longer-term debt. The spread has narrowed from a record 2.94 percentage points reached Feb. 18. It was at 2.80 percentage points today. 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 the size of the government’s debt and the outlook for inflation. Treasury Sales The Treasury is scheduled to sell $40 billion in three-year notes tomorrow, $21 billion in 10-year debt the following day and $13 billion in 30-year bonds on March 11. The three-year sale ties a record. The euro climbed for a second day against the yen and the dollar on speculation Greece will receive assistance in tackling the European Union’s biggest budget deficit, boosting demand for higher-yielding assets. “If there is a problem, then official money will be made available” from either the European Union or the International Monetary Fund, Erik F. Nielsen, chief European economist at Goldman Sachs Group Inc. in London, wrote in an e-mailed note yesterday. Goldman Sachs helped Greek officials raise $1 billion of off-balance-sheet funding in 2002. Drawing Demand Treasuries are drawing demand from municipal bond investors, who are buying as state and local government finances worsen and the yield advantage for tax-exempt securities evaporates. Local government bonds due in three years with AAA ratings yielded 66 percent of similar maturity Treasuries last month, about the lowest level since Bloomberg began compiling the data in 2001. If the ratio moves closer to 60 percent, investors in the 38.3 percent federal tax bracket would lose all the benefits of sheltering income that comes from municipal debt. Municipal bonds are losing favor as state and local governments raise taxes to fund the record $18.5 billion in budget gaps estimated in a National Governor’s Association survey. Increased buying by tax-exempt investors would aid short-maturity Treasuries, which benefitted this year from demand for a refuge from sovereign credit concerns. “Treasuries are safer and more liquid investments, especially given the quality issues with many municipalities of late,” said Jeffrey Schoenfeld, partner and chief investment officer in New York at Brown Brothers Harriman & Co., which manages $33 billion in assets. Investors became less bearish on U.S. government debt last week, according to a survey by Ried Thunberg ICAP Inc., a unit of ICAP Plc, the world’s largest inter-dealer broker. The company’s index measuring the outlook for Treasuries through the end of this month rose to 45 for the week ended March 5 from 43 in the prior period. A figure of less than 50 shows investors expect prices to fall. The company, based in Jersey City, New Jersey, interviewed 27 fund managers controlling $1.42 trillion. To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.

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