By Daniel Kruger Aug. 22 (Bloomberg) -- Treasuries fell for a second week as reports showed stabilization in the housing industry and Federal Chairman Ben S. Bernanke said the global economy is “beginning to emerge” from recession. Two-year note yields gained the most since the five days ended Aug. 7 after starts of single-family dwellings rose for a fifth month and sales of existing homes surged in July. Bernanke said that “prospects for a return to growth in the near term appear good.” The U.S. announced plans to sell $109 billion of two-, five- and seven-year notes next week, equal to the record for that combination of maturities. “It’s the trifecta coming into play,” said Kevin Flanagan, a Purchase, New York-based fixed-income strategist for Morgan Stanley Smith Barney. “Bernanke’s comments, which were interpreted to be more on the upbeat side than one would have originally thought. The existing home sales figures, adding to that. And you can’t dismiss the fact we have supply next week.” The yield on the two-year note rose four basis points on the week, or 0.04 percentage point, to 1.09 percent, according to BGCantor Market Data. The 1 percent security maturing July 2011 fell 2/32, or 31 cents per $1,000 face amount, to 99 26/32. The five-year note yield climbed five basis points to 2.56 percent and the seven-year note yield increased three basis points to 3.20 percent. Yields on 10-year notes were flat on the week and 30-year bond yields declined five basis points as producer prices fell 0.9 percent in July, more than forecast, capping the biggest 12- month drop on record, according to a Labor Department report released Aug. 18. The 10-year yield dropped as low as 3.37 percent, the lowest since July 14, after falling 28 basis points last week, the most since December. ‘Aggressive’ Central Banks The global economy is beginning to emerge from recession after “aggressive” action by central banks and governments, Bernanke said in a speech yesterday at the Kansas City Fed’s annual symposium in Jackson Hole, Wyoming. Bernanke, speaking to an audience of central bankers and academic, warned that the world still confronts “critical” challenges. “Strains persist in many financial markets across the globe, financial institutions face additional significant losses and many businesses and households continue to experience considerable difficulty gaining access to credit,” Bernanke said. Recovery “is likely to be relatively slow at first, with unemployment declining only gradually from high levels.” The note of caution underscored the Fed’s decision last week to leave interest rates near zero for an “extended period” and to delay by a month the scheduled end to its program to buy Treasuries. Future ‘Consequences’ Policy makers have more than doubled the Fed’s balance sheet to $2.06 trillion since last September as central bankers have committed to buying assets, including $300 billion of Treasuries and $1.45 trillion of mortgages and agency debt to thaw credit markets that froze last year. The flood of liquidity could lead to speculative bubbles due to limited opportunities for investment, according to Joseph Stiglitz, winner of the Nobel Prize for economics. “As the balance sheet of the Fed has blown up, as the deficit of the U.S. and the debt has increased, people have asked the obvious question: will there be inflation in the future?” Stiglitz, a professor at Columbia University, said at a conference in Bangkok yesterday. “Right now we’re facing deflation, but some time in the future, there will be consequences.” The U.S. 10-year breakeven rate, a gauge of investor expectations for inflation that measures the difference in yield between index-linked and conventional bonds, rose to 190 basis points yesterday, from 9 basis points at the start of the year. The spread has averaged 220 basis points in the past five years. Employment Concerns Stocks advanced, with the Standard & Poor’s 500 Index gaining 2.2 percent on the week as investors bet on recovery. The economy is forecast to grow at an annualized rate 2.2 percent in the third quarter and 2 percent in the fourth quarter, according to a Bloomberg News survey of 57 economists. Rising job losses could temper gains in riskier assets. While the unemployment rate dipped last month, economists project it will reach 10 percent by early next year, restraining consumer spending. More Americans than forecast filed claims for jobless benefits last week. Applications rose to 576,000 the week ended Aug. 15, above the 550,000 median estimate of economists surveyed by Bloomberg News. “We will hold off on making a call on the payroll report pending more data, but the indications from claims thus far suggest that it will be on the disappointing side relative to last month’s outcome,” Goldman Sachs Group Inc. economists in New York led by Jan Hatzius wrote in a note to clients Aug. 20. Treasury 10-year yields climbed the most in a week since 2003 for the week ended Aug. 7 after the Labor Department said the economy lost 247,000 jobs in July, fewer than the 325,000 forecast in a Bloomberg News survey. More Supply The U.S. will sell $42 billion of two-year notes, $39 billion of debt maturing in five years and $28 billion of seven- year securities on three consecutive days beginning Aug. 25, equal to the amount of those notes sold last month. The Treasury’s sales last month of 2- and 5-year notes drew lower-than-forecast interest from investors amid concern the government’s deluge of borrowing would overwhelm demand. The Fed bought $2.599 billion in Treasuries during the week, the least since its program began in March, bringing its total purchases to $262.377 billion. The central bank on Aug. 19 announced plans to buy debt three times over the next two weeks, down from four times per two-week period. Policy makers said Aug. 12 they plan to slow the pace of Treasury purchases as the recession eases and signaled that the $300 billion program will end in October. The buying was previously scheduled to end in September. ‘Uncharted Territory’ The U.S. must address the massive amounts of “monetary medicine” that have been pumped into the financial system and now pose threats to the world’s largest economy and its currency, billionaire Warren Buffett said. The “gusher of Federal money” has rescued the financial system and the U.S. economy is now on a slow path to recovery, Buffett wrote in a New York Times commentary Aug. 19. While he applauded measures adopted by the Fed and officials from the administrations of George W. Bush and Barack Obama, Buffett said the U.S. is fiscally in “uncharted territory.” Marketable Treasury debt has increased 50 percent to $6.78 trillion since the end of 2007 as Bush and Obama borrowed to sustain the economy and the financial system after the U.S. entered its longest economic contraction since the Great Depression. The National Bureau of Economic Research, which dates business cycles, said the recession began in December 2007. The non-partisan Congressional Budget Office forecast the budget deficit for fiscal 2009, ending Sept. 30, will reach a record $1.85 trillion. To contact the reporter on this story: Daniel Kruger in New York at dkruger1@bloomberg.net.

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