Dec. 8 (Bloomberg) -- Treasuries and Japanese bonds fell, while the German 10-year yield rose to 3 percent for the first time since May as optimism the global economic recovery is gathering pace sapped demand for the safety of fixed income. Treasury 10-year notes extended yesterday’s decline, the biggest in 18 months, as President Barack Obama’s agreement on Dec. 6 to extend tax cuts for two years boosted the outlook for the U.S. recovery. Japanese five-year yields jumped by the most in more than two years, while Australian 10-year yields advanced by the most in more than six months. “Improving optimism over global-growth prospects reduces demand for fixed-income assets, which are offering very low yields,” said Peter Chatwell, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. “Treasuries are under tremendous pressure. Obama’s tax accord has led the market to factor in the impact of increased U.S. economic growth.” The yield on the 10-year Treasury note advanced six basis points to 3.19 percent as of 6:44 a.m. in New York, after reaching 3.25 percent, the highest since June 22, according to BGCantor Market Data. The 2.625 percent security due November 2020 fell 16/32, or $5 per $1,000 face amount, to 95 6/32. The yield surged 21 basis points yesterday. The extra yield investors demand to hold 10-year notes over 2-year debt increased to as much as 2.68 percentage points today, the most since May 18. ‘Negative Growth’ Japan’s five-year note yield jumped 10 basis points to 0.524 percent in Tokyo at Japan Bond Trading Co., the nation’s largest interdealer debt broker. The increase in yields was the biggest since June 11, 2008, Bloomberg data showed. “Japan is unlikely to sustain negative growth as long as economies in emerging markets and the U.S. are resilient,” said Ayako Sera, who helps oversee about $310 billion in Tokyo as a strategist at Sumitomo Trust & Banking Co., a unit of Japan’s third-largest banking group. “Bond yields are correcting from levels that were too low.” The yield on the bund, Europe’s benchmark government security, gained five basis points to 2.99 percent, after reaching 3.03 percent earlier today. That’s the highest since May 4. Australian 10-year yields rose as much as 18 basis points to 5.61 percent, the most since May. Treasuries also fell as an auction yesterday of $32 billion of three-year debt drew the least demand since February. The U.S. sells $21 billion of 10-year securities today and $13 billion of 30-year bonds tomorrow. The dollar gained against 12 of its 16 major counterparts as Treasury yields surged. It rose for a third day against the euro and the yen. Monetary Policy The dollar rose less than 0.1 percent to $1.3253 per euro. The U.S. currency reached $1.3442 per euro on Dec. 6, the weakest since Nov. 23. It gained 0.4 percent to 83.85 yen, from 83.49 yen yesterday, when it touched 82.34 yen, the lowest since Nov. 12. The idea that both monetary and fiscal policies are loosening further spurred hopes of stronger U.S. growth as well as risks on inflation, analysts at BNP Paribas SA wrote in a research note today. “Reassessment of the U.S. outlook is very unfavorable for Treasuries,” they wrote. “Supply is adding weight. Further concession may be seen before the market stabilizes. This is clearly weighing on core euro-government bonds as well.” The $21 billion of 10-year notes to be sold today yielded 3.19 percent in pre-auction trading, compared with 2.636 percent at the prior sale on Nov. 9. Investors bid for 2.80 times the amount offered last month, compared with 2.99 times on Oct. 13. Auction At yesterday’s three-year note auction, the securities drew a yield of 0.862 percent, compared with the average forecast of 0.841 percent in a Bloomberg News survey of primary dealers. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of debt offered, was 2.91, the lowest level since February. “The auctions are a little bit disappointing, and that reflects the fact that investors want more of a premium attached to Treasuries,” said Adam Carr, a senior economist in Sydney at ICAP Australia Ltd., a unit of the world’s largest interdealer broker. The U.S. will auction $13 billion of 30-year debt tomorrow, completing this week’s $66 billion of note and bond sales. Losses in Treasuries were tempered on speculation Ireland’s debt crisis will spread, underpinning demand for safer assets. Ireland is under pressure to pass legislation to receive an 85 billion-euro ($112.6 billion) bailout. Lawmakers yesterday passed an initial series of votes on a 6 billion-euro budget in parliament in Dublin. The government faces at least three more votes, including a separate ballot on cuts in welfare payments before the budget is approved. Obama’s Deal Obama’s deal with the Republicans agreed on the two-year extension of current tax rates in exchange for another 13 months of federal unemployment insurance for the long-term jobless and cutting the payroll tax by $120 billion for one year. The President said he would accept a lower rate for the estate tax than Democrats wanted in order to break a stalemate over extending George W. Bush’s tax cuts before Congress adjourns. “Treasuries are sharply weaker after President Obama extended the Bush tax cuts,” analysts including Josephine Heffernan, Sydney-based senior economist at St. George Bank Ltd., wrote in a research note today. “The extension will see a further widening in the government deficit and increase the supply of bonds.” Consumer Confidence Thirty-year yields rose to a six-month high before reports this week that economists said will show consumer confidence increased and fewer Americans filed claims for unemployment benefits. The 30-year yield gained two basis points to 4.38 percent after touching 4.44 percent, the most since May 14. Jobless claims declined by 11,000 to 425,000 in the week ended Dec. 4, according to a Bloomberg survey before the Labor Department report tomorrow. The Thomson Reuters/University of Michigan preliminary index of consumer sentiment rose to 72.5 in December from 71.6 the prior month, a separate Bloomberg survey showed before the figures are released on Dec. 10. The difference between yields on 10-year notes and those on Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the securities, widened to as much as 2.28 percentage points today, matching yesterday, which was the most since May 14. The Federal Reserve will purchase $1 billion to $2 billion of inflation-protected securities maturing from July 2012 to February 2040 today, according to the New York Fed’s website. U.S. government debt has handed investors a 6.2 percent return so far this year, according to Bank of America Merrill Lynch indexes. That compares with a 6.1 percent for German debt, and a 1.7 percent gain for Japanese securities. --Editors: Mark McCord, Matthew Brown. To contact the reporters on this story: Keith Jenkins in London at kjenkins3@bloomberg.net; Ron Harui in Tokyo at rharui@bloomberg.net. To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

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