Treasury two-year note yields were within three basis points of an eight-month high as rising stocks and forecasts that retail sales and industrial production gained in January reduced demand for the safest assets. The difference between two-year note yields and the Federal Reserve’s target for overnight lending between banks was 58 basis points, after widening to 60 basis points on Feb. 8, the highest level since May. President Barack Obama is due to submit a budget to Congress today. “The indicators are signaling expansion, which is good and weighs on the Treasury market,” said Karsten Linowsky, a strategist at Credit Suisse Group AG in Zurich. “Retail sales is a key figure because the consumption component in the gross domestic product is very large.” Two-year note yields increased less than one basis point, or 0.01 percentage point, to 0.84 percent at 7:21 a.m. in New York, according to BGCantor Market Data. The price of the 0.625 percent security maturing in January 2013 dropped less than 1/32, or 31 cents per $1,000 face amount, to 99 18/32. Benchmark 10-year note yields advanced two basis points to 3.65 percent. The two-year note yield climbed to 0.86 percent on Feb. 9, the highest level since May 28. U.S. government securities maturing in more than a year have handed investors a 1.3 percent loss this month, the worst performance of 26 sovereign-bond markets tracked by the European Federation of Financial Analysts Societies and Bloomberg. The MSCI World Index of stocks have gained 2.6 percent. Gain in Stocks The MSCI Asia Pacific Index of shares rose as much as 1.8 percent today, the most in three months, while the Stoxx Europe 600 Index gained 0.2 percent. U.S. retail sales increased 0.5 percent last month following a 0.6 percent gain December, according to the median forecast of 62 economists in a Bloomberg News survey before figures from the Commerce Department tomorrow. Fed figures the next day may show industrial production rose 0.5 percent in January, a separate survey of economists showed. The U.S. central bank has held its fed funds target at zero to 0.25 percent since December 2008 and is pursuing a program of asset buying, known as quantitative easing, aimed at boosting the economy. “The Fed is clearly on hold, but the market fears more inflation further down the line,” said David Schnautz, a fixed-income strategist at Commerzbank AG in London. “The intermediate and the long end of the curve will suffer as the market pushes for higher yields.” Dudley’s Address New York Fed President William Dudley, an advocate of the Fed’s asset-purchase programs, is scheduled to speak at a regional economic briefing at the bank’s headquarters today. The Obama administration’s 2012 budget, due to be sent to Congress today, would save $1.1 trillion over the next 10 years to rein in a deficit that may reach a record $1.5 trillion this year, White House Budget Director Jacob Lew said yesterday on CNN’s “State of the Union” program. The Fed is scheduled to buy $1 billion to $2 billion of Treasury Inflation Protected Securities maturing from April 2013 to February 2040 today as part of its effort to spur growth. The consumer price index advanced 0.3 percent in January, slowing from the 0.5 percent gain in December, according to the median forecast in a Bloomberg News survey of economists before the Labor Department’s figures are published Feb. 17. The inflation report will also show costs excluding food and energy increased 0.9 percent in January from a year earlier, the Bloomberg surveys show. Inflation View “A higher-than-expected number could shake confidence” and could cause Treasuries to fall, said Charles Diebel, head of market strategy at Lloyds TSB Bank Plc in London. Core inflation in the U.S. has been very benign, so any kind of pickup in that is going to prove quite worrying.” The difference between yields on 10-year notes and TIPS, a gauge of trader expectations for consumer prices over the life of the securities, was little changed at 2.30 percent today. It hit a 15-month low of 1.47 percent in August. While some of the lowest borrowing costs on record have helped the U.S. economy recover from its worst financial crisis since the Great Depression, bond yields are now rising as growth resumes. Net interest expenses will triple to an all-time high of $554 billion in 2015 from $185 billion in 2010, according to the government’s adjusted 2011 budget Fund managers became less bearish on the outlook for Treasuries through March, according to a weekly survey by Ried Thunberg ICAP Inc. Ried’s sentiment index rose to 49 for the seven days ended Feb. 11 from 45 the week before. A figure less than 50 indicates investors expect prices to decline. The fund managers surveyed turned more pessimistic when asked about the outlook for Treasuries through June 30. To contact the reporters on this story: Emma Charlton in London at echarlton1@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

Source