Treasury 30-year notes declined for a second day before a report that may show orders for U.S. durable goods rose in December, fueling speculation that asset purchases by the Federal Reserve will stoke inflation. The losses pushed the difference in yield, or spread, with two-year notes within four basis points of a record. Japanese bonds erased gains after the country’s sovereign-credit rating was downgraded one step to AA- by Standard and Poor’s. The U.S. is scheduled to sell $29 billion of seven-year debt today, the last of three note auctions this week. The Fed said yesterday it intends to stick to its plan to purchase $600 billion of securities by June 30. “Investors are getting jittery that the very accommodative monetary stance against the backdrop of an improving economy could store up inflation,” said Nick Stamenkovic, a fixed- income strategist at RIA Capital Markets Ltd. in Edinburgh. “Investors may start to increasingly demand a higher risk premium for holding longer-dated Treasuries.” The 30-year yield increased two basis points to 4.61 percent as of 6:09 a.m. in London, adding to yesterday’s 10-basis point advance. The 4.5 percent security maturing in November 2040 slipped 11/32 or $3.44 per $1,000 face amount, to 94 5/32. Ten-year yields rose three basis points to 3.44 percent, while the two-year note yield was steady at 0.64 percent. Goods Orders The difference between 2- and 30-year rates was 3.98 percentage points. The spread widened to a record 4.01 percentage points on Jan. 20, indicating investors have been demanding greater compensation for holding the longer-dated securities, which are more sensitive to the inflation outlook. Orders for goods meant to last at least three years probably climbed 1.5 percent after declining 0.3 percent in November, according to the median estimate of 81 economists surveyed by Bloomberg News before the Commerce Department releases the data. Other reports today may show pending home sales rose and initial jobless claims were little changed. The U.S. economy grew at a 3.5 percent annual rate in the fourth quarter of 2010, up from a 2.6 percent rate in the previous three months, economists forecast the Commerce Department will report tomorrow. Treasuries are heading for a fourth monthly decline and have handed investors a 3 percent loss since the end of September, based on Bank of America Merrill Lynch data. Ten-year Treasury Inflation Protected Securities show bondholders expect the consumer price index to increase 2.29 percentage points annually on average over the life of the debt. Economists surveyed by Bloomberg forecast an inflation rate this year of 1.7 percent. “It seems that the topic of inflation is becoming increasingly established on the financial markets this year,” Viola Stork and Ulrich Wortberg, economists at Helaba Landesbank Hessen-Thueringen in Frankfurt, wrote in an investor note today. “Indeed, prices are trending upward in many developed economies.” To contact the reporter on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

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