Treasuries fell, extending their biggest monthly loss in a year, on speculation data showing the recovery is gaining momentum will fuel concern that debt supply will overwhelm demand as inflation accelerates. Five-year notes led losses before data that economists said will show sales of existing homes and gross domestic product increased. The Treasury is tomorrow scheduled to announce the sizes of two-, five- and seven-year auctions for next week. Ten- year yields have increased 41 basis points since Dec. 6, when President Barack Obama agreed to a two-year extension for tax cuts, widening the deficit and fueling bets that growth and inflation will quicken. “People are worried about the impact of the stimulus package on the budget situation, and it’s also worrying the market from an inflation angle,” said Eric Wand, a fixed-income strategist at Lloyds TSB Bank Plc in London. “We’ll have to see how the market handles the new supply in a relatively thin environment.” Benchmark 10-year yields gained three basis points to 3.34 percent at 6:49 a.m. in New York, according to BGCantor Market Data. The price of the 2.625 percent security maturing in November 2020 declined 8/32, or $2.50 per $1,000 face amount, to 94 2/32. Five-year yields also rose three basis points, to 1.98 percent, while the two-year rate was at 0.61 percent. The difference between 10- and two-year yields was at 2.72 percentage points, about double the five-year average. A wider spread signals that investors are shunning longer-dated securities, which are more sensitive to the inflation outlook. Home Sales Home purchases probably increased 7.1 percent in November from October, the National Association of Realtors will say, according to the median of estimates in a Bloomberg News survey of economists. The economy grew at a 2.8 percent annual rate in the third quarter, more than the 2.5 percent pace the government estimated last month, a separate survey showed. Treasuries have handed investors a 2 percent loss this month, according to Bank of America Merrill Lynch indexes, as the Federal Reserve implemented a plan to add $600 billion to the economy to spur inflation. The central bank is scheduled to buy $1.5 billion to $2.5 billion of government securities due from February 2021 to November 2027 today as part of the program, according to its website. The last time U.S. sovereign debt fell more in a month was in December 2009, when it dropped 2.6 percent. Higher Yields Ten-year yields have climbed about 1 percentage point from this year’s low. Yields indicate investors added to bets in November and December for the Fed to raise interest rates next year. Two-year yields, among the most sensitive to Fed expectations, climbed to 36 basis points more than the central bank’s rate target from this year’s low of 8 basis points in November. The five-year average is three basis points. “We expect the economy to be strong over the next year,” said Tsutomu Komiya, who handles U.S. debt in Tokyo for Daiwa Asset Management Co., which oversees the equivalent of $102.7 billion and is part of Japan’s second-biggest brokerage. “Shorter-end interest rates will rise faster than longer rates. The Federal Reserve may hike at the end of next year.” Kei Katayama, who helps oversee the equivalent of $54.3 billion as leader of the foreign fixed-income group in Tokyo at Daiwa SB Investments Ltd., a unit of Japan’s second-biggest brokerage, said he’s considering buying as 2011 begins to take advantage of higher returns offered by bonds. “The yield is quite high,” he said. “There are still a lot of problems with the U.S. economy.” ‘Too Aggressive’ Barclays Capital Inc., one of the 18 primary dealers that are required to bid at the government debt sales, is recommending short-term maturities. “The market seems too aggressive in pricing monetary tightening,” Barclays analysts Ajay Rajadhyaksha and Dean Maki in New York wrote in a report yesterday. Goldman Sachs Group Inc., another primary dealer, increased its forecast for the U.S. budget deficits by $50 billion for each of the next two years because of Obama’s plan. The bank is projecting federal deficits of $1.3 trillion for the 12 months ending Sept. 30 and $1.05 trillion for the following fiscal year, Ed McKelvey, the senior U.S. economist, wrote in a report yesterday in New York. The shortfall totaled $1.29 trillion in the prior business year, versus the record $1.42 trillion deficit in 2009, according to the Treasury Department. The government’s current schedule of note and bond sales is enough to fund the deficits, according to the report. The U.S. may even pay down some of its bills, McKelvey wrote. To contact the reporter on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

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