Dec. 14 (Bloomberg) -- Treasuries dropped, pushing the 10- year note yield toward a six-month high, as reports before the Federal Reserve’s statement showed retail sales increased more than forecast and producer prices accelerated. U.S. debt also fell on bets President Barack Obama’s plan to extend tax cuts will win passage in Congress, supporting the economic recovery. Federal Open Market Committee policy makers meeting today in Washington may reiterate support for purchases of government debt. “The data is stronger across the board, but the market is holding near where it was going into the numbers, which means many of the bad longs have been flushed out,” said Christian Cooper, head of U.S. dollar derivatives trading in New York at Jefferies Group Inc., one of the 18 primary dealers that trade with the Fed. “The market will now look to the FOMC meeting to see if there is any significant change in the statement. Any change will be highly scrutinized.” A long is a bet an asset may gain in value. The 10-year note yield increased six basis points, or 0.06 percentage point, to 3.34 percent at 9:02 a.m. in New York, according to BGCantor Market Data. The price of the 2.625 percent security maturing in November 2020 fell 15/32, or $4.69 per $1,000 face amount, to 94 1/32. A one-point drop in 30-year bonds pushed the yield up seven basis points to 4.47 percent. The two-year note yield gained one basis point to 0.60 percent. The yield on the 10-year note touched 3.39 percent yesterday, the highest level since June 3. The yield will rise to 3.55 percent by the end of 2011, according to the average forecast in a weighted Bloomberg survey of economists. Yield Trend “In the medium to long term, the trend is up in terms of yields,” said Marc Ostwald, a fixed-income strategist at Monument Securities Ltd. in London. The Fed, holding its final policy meeting of 2010 today, announced on Nov. 3 an additional $600 billion of Treasury purchases through June under the policy known as quantitative easing to support the economic recovery. Buying more government bonds is “certainly possible,” Fed Chairman Ben S. Bernanke said in an interview broadcast on CBS Corp.’s “60 Minutes” on Dec. 5. “It depends on the efficacy of the program” and the outlook for inflation and the economy, Bernanke said. “The market probably expects that Bernanke will very much be jawboning and talking up QE2 as a responsible policy,” said Damien McColough, head of fixed-income research in Sydney at Westpac Banking Corp., Australia’s second-largest lender. “I’m not hugely bearish from here” on Treasuries. Fed Debt Buying Primary dealers submitted yesterday $18.268 billion of debt due from June 2016 to November 2017 for possible purchase by the central bank, compared with $33.126 billion in the same maturity range on Dec. 9. The Fed bought $7.79 billion of debt yesterday, part of $105 billion in purchases over the next month. Obama’s agreement with Republicans last week to extend Bush-era tax cuts is likely to boost economic growth in the next two years but will “adversely affect” the budget deficit, Moody’s Senior Credit Officer Steven Hess in New York wrote in a note yesterday. “Unless there are offsetting measures, the package will be credit-negative for the U.S. and increase the likelihood of a negative outlook on the U.S. government’s Aaa rating during the next two years,” Hess wrote. Obama’s deal, announced Dec. 6, includes a two-year extension of tax rates in return for extending long-term jobless benefits for 13 months and cutting the payroll tax by $120 billion for a year. Retail Sales Retail sales gained 0.8 percent last month as Americans started their holiday shopping, the Commerce Department reported today. The median forecast of 77 economists in a Bloomberg News survey was for an increase of 0.6 percent. Wholesale costs in the U.S. rose in November by the most in eight months, led by higher prices for gasoline, heating oil and fruit. The producer price index increased 0.8 percent from the prior month after a 0.4 percent advance, the Labor Department said. Excluding more volatile food and energy costs, the core measure posted the smallest year-over-year gain in five months. --With assistance from Candice Zachariahs in Mumbai. Editors: Dennis Fitzgerald To contact the reporters on this story: Cordell Eddings in New York at ceddings@bloomberg.net; Lukanyo Mnyanda in London at lmnyanda@bloomberg.net To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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