Treasury 10-year notes dropped, pushing the yield toward its biggest weekly increase this year, as increases in U.S. exports and consumer confidence sapped demand for the safety of government debt. Yields approached the highest level in six months on speculation President Barack Obama’s agreement this week to extend tax cuts will help spur the economic recovery. Government yields extended their gains as stocks rose. “The narrowing trade gap and the consumer-confidence print provide some optimism for the growth picture and is weighing on Treasuries some,” said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut. The yield on the 10-year note rose 12 basis points, or 0.12 percentage point, to 3.32 percent at 5:11 p.m. in New York, according to BGCantor Market Data. The 30-year bond yield increased three basis point to 4.43 percent after dropping six basis points yesterday, when the $13 billion U.S. sale of the debt drew the highest demand since August. The yield increased to a seven-month high of 4.5 percent on Dec. 8, buoying the government bond auction. Bonds tumbled this week after Obama agreed on Dec. 6 to a 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 a year. Pimco’s Outlook Pacific Investment Management Co., which manages the world’s biggest bond fund, is raising its forecast for U.S. growth next year as policy makers pump a “massive amount” of stimulus into the economy, Chief Executive Officer Mohamed El- Erian said in a telephone interview yesterday from his office in Newport Beach, California. “The market will be under pressure as people raise their growth estimates,” said Thomas Tucci, head of U.S. government bond trading in New York at Royal Bank of Canada’s RBC Capital Markets, one of the 18 primary dealers that trade directly with the Federal Reserve. “People were hoping the market would hold in here today, but we are not through the tax-policy shift.” The trade deficit narrowed 13 percent to $38.7 billion, less than the lowest estimate of 78 economists surveyed by Bloomberg News and the smallest since January, Commerce Department figures showed today in Washington. Exports were the strongest since August 2008 as Mexico and China bought record amounts of U.S. products. Consumer Sentiment The Thomson Reuters/University of Michigan preliminary index of consumer sentiment increased to 74.2 in December from 71.6 in the previous month. The median forecast of 67 economists in a Bloomberg News survey was for an advance to 72.5. U.S. government debt has lost 1 percent this week, paring this year’s return to 5.8 percent, according to Bank of America Merrill Lynch indexes. The 10-year note yield has climbed 31 basis points this week, the most since a 27 basis point increase during the five days ended Dec. 25, 2009. A slump in Treasuries earlier this week over the tax-cut extension pushed 10-year note yields up 35 basis points in two days, the most since September 2008, when markets were in upheaval after the bankruptcy of Lehman Brothers Holdings Inc. The Fed is preparing to gather Dec. 14 after announcing last month a $600 billion second round of U.S. debt buying through June to support the economy under quantitative easing. The central bank expects to reinvest $250 billion to $300 billion of proceeds from mortgage-backed debt and agency securities into Treasuries during that time. Fed Debt Buying The central bank will purchase about $105 billion of Treasuries during the next month, the New York Fed said in a schedule posted on its website. Treasury 30-year bonds advanced today in Asian trading as China ordered lenders to deposit more money with the central bank to prevent inflation from accelerating. China’s statistics bureau moved forward the release of economic data including figures on inflation to Dec. 11 from Dec. 13, which fueled speculation the nation was preparing to boost borrowing costs. Consumer prices increased 4.7 percent in November from a year earlier, accelerating after a boost of 4.4 percent in the previous month, according to the median forecast of 29 economists in a Bloomberg News survey. At yesterday’s U.S. 30-year bond auction, the bid-to-cover ratio, which gauges demand by comparing total bids with the amount of debt offered, climbed to 2.74, the most since the Aug. 12 sale. The bonds were sold at a yield of 4.410 percent, compared with the average forecast of 4.477 percent in a Bloomberg survey of primary dealers. The $32 billion 3-year note auction on Dec. 7 attracted the lowest bid-to-cover ratio since February. The Treasury sold $21 billion of 10-year notes on the following day at a yield of 3.34 percent, the highest in seven months. There won’t be another round of note offerings until the Treasury sells 2-, 5-and 7- year debt starting Dec. 27. To contact the reporters on this story: Cordell Eddings in New York at ceddings@bloomberg.net; Susanne Walker in New York at swalker33@bloomberg.net To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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