Treasuries fell before a government report that economists said will show the U.S. cost of living increased the most in 16 months. The 10-year yield rose from within two basis points of the lowest in more than three weeks. U.S. inflation-linked bonds are outperforming Treasuries for a second month as investors seek protection from rising prices in the economy. The difference between 2- and 30-year rates widened to a record earlier this week, indicating investors are demanding more yield to preserve the value of their holdings. The Federal Reserve is pumping $600 billion into the economy to avoid deflation. “If we saw not only a rise in the headline rate but also signs that the core rate is rising as well, that would be bad news for Treasuries,” said Nick Stamenkovic, a fixed-income strategist at RIA Capital Markets Ltd. in Edinburgh. The two-year yield climbed four basis points to 0.63 percent at 11 a.m. in London. The 0.625 percent security maturing in December 2012 fell 2/32, or 62.5 cents per $1,000 face amount, to 100. The 10-year yield gained one basis point to 3.32 percent. The Labor Department will likely say today its consumer- price index climbed 0.4 percent in December from November, the biggest increase since August 2009, according to a Bloomberg News survey of economists. Core costs, which exclude food and fuel, are forecast to gain 0.1 percent, the survey showed. Separate figures will show retail sales and industrial production increased, economists said. Intel Corp., the world’s biggest chipmaker, yesterday forecast first-quarter sales that may exceed analysts’ estimates. Chinese Tightening Treasuries remained lower after China’s central bank said it will raise the reserve requirement ratio for the nation’s banks by 50 basis points from Jan. 20. The increase comes within three weeks of China boosting benchmark interest rates to rein in liquidity after the nation’s foreign-exchange reserves surged by a record last quarter and new loans breached a 2010 target. U.S. thirty-year yields climbed to 3.93 percentage points more than two-year rates on Jan. 12, the steepest slope to the so-called yield curve based on Bloomberg data going back to 1977. Treasuries rose yesterday after the central bank purchased more of the securities than traders expected. The Fed bought $8.4 billion of debt as part of its bond- purchase plan. The purchases amounted to 40.1 percent of the $21 billion offered by holders, compared with an average accepted- to-submitted ratio of 30.6 percent at the previous 10 operations. Short Maturities “The Treasury purchase program was more aggressive than thought, and that added ‘umph’ to the market,” said Kevin Flanagan, a Purchase, New York-based fixed-income strategist at Morgan Stanley Smith Barney. The Fed is today scheduled to buy $6 billion to $8 billion of Treasuries due from January 2015 to June 2016, according to its website. Investors should favor short maturities, those most sensitive to the outlook for Fed rates, because traders betting on an increase this year are being “too aggressive,” Ajay Rajadhyaksha and Dean Maki, analysts at Barclays Capital Inc. in New York, wrote in a report yesterday. The company is also a primary dealer. Federal funds futures contracts for delivery in March 2012 yield 0.49 percent, indicating investors expect the central bank to increase its target for overnight lending to that level by then. The Fed cut the target to a range of zero to 0.25 percent in December 2008. Fed Chairman Ben S. Bernanke said yesterday an increase in market interest rates in recent months reflects an improved outlook for the U.S. economy. Unemployment won’t fall at the pace Fed officials want, he said at a Federal Deposit Insurance Corp. forum in Arlington, Virginia.

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