Oct. 1 (Bloomberg) -- Treasuries were little changed, following a two-day loss, before reports today that economists said will show U.S. manufacturing expanded last month and consumer spending increased in August. Treasury bears say yields will rise on mounting signs the world’s largest economy is recovering from its worst slump since the Great Depression, reducing demand for the safety of debt. Ten-year yields will climb almost a third of a percentage point by year-end, according to a Bloomberg News survey. The Treasury will today announce it plans to sell $78 billion of notes and bonds next week, according to Wrightson ICAP LLC, a unit of the world’s largest inter-dealer broker. “I’m bearish for Treasuries because the economic condition is recovering, even if it’s mainly the direct effect of stimulus packages,” said Yasutoshi Nagai, chief economist in Tokyo at Daiwa Securities SMBC Co., a unit of Japan’s second-largest brokerage. “Economic figures will continue to improve this year. It’s difficult to buy 10-year notes at these yield levels.” The 10-year note yielded 3.31 percent as of 1:22 p.m. in Tokyo, according to BGCantor Market Data. The 3.625 percent security due August 2019 fell 1/32, or 31 cents per $1,000 face amount, to 102 5/8. Yields slipped 23 basis points last quarter, the biggest drop since a 161 basis point decline in the final three months of 2008. Yields may rise to 3.70 percent by the end of December, Daiwa’s Nagai said. His prediction is higher than a forecast of 3.60 percent in a Bloomberg survey with a heavier weighting on more recent forecasts. Should Nagai’s prediction prove accurate, investors who buy today would incur a loss of 2.3 percent, according to Bloomberg calculations. Best in a Year The world’s biggest economy shrank at an annual rate of 0.7 percent from April through to June, the smallest contraction in more than a year, revised figures from the Commerce Department showed yesterday. The Institute for Supply Management will report today its manufacturing index rose to 54 in September, the highest since April 2006, according to a Bloomberg survey. A reading above 50 signals expansion. Consumer spending climbed 1.1 percent in August from the previous month, the most since August 2003, economists forecast the Commerce Department report will show. Incomes grew 0.1 percent, reflecting the job losses, according to the survey median. “In the near-term, the economic recovery still seems quite strong, especially from the production side,” Mustafa Chowdhury, head of U.S. interest-rates research in New York at Deutsche Bank Securities Inc., said yesterday. “The data continues to be strong, even though the consumer picture looks less certain.” Stock Gains Any losses in Treasuries may be tempered as Asian stocks declined, boosting demand for government debt. The MSCI Asia Pacific Index of regional shares slid 1.1 percent, ending two days of gains. Two- and 10-year yields are likely to decline to their December and April lows, respectively, as deflation pressures prompt the Federal Reserve to keep interest rates close to zero, according to BNP Paribas Securities Japan Ltd. “Signs of deceleration in core inflation will be accentuated towards the end of the year, which will help the bond market,” said Hidehiko Maejima, an international bond strategist in Tokyo at BNP Paribas Securities Japan Ltd., a unit of a U.S. primary dealer that trades directly with the Fed. Two-year yields will fall to 0.75 percent by the end of March, from 0.95 percent today, and 10-year yields will slide more than half a percentage point to 2.75 percent, Maejima said. Spread Narrows The difference in yield between 10-year notes and similar- maturity Treasury Inflation Protected Securities, which reflects the outlook among traders for consumer prices, was at 1.76 percentage points, down from this year’s high of 2.13 percentage points in June. Fed Vice Chairman Donald Kohn said yesterday that low inflation means the central bank can keep interest rates at around zero “for an extended period.” “Exceptionally low interest rates are likely to be warranted for an extended period,” Kohn said in remarks at a conference sponsored by the Cato Institute and the Shadow Open Market Committee in Washington. “Resource utilization is quite low, inflation is subdued and continuing restraints on credit are likely to constrain the speed of recovery.” Kohn’s comments contrasted with Fed Governor Kevin Warsh, who wrote in an opinion piece published last week on the Wall Street Journal’s Web site that the central bank may need to be as aggressive in reversing its actions to revive the economy and financial markets as policy makers were in starting them. Rate Outlook Futures on the Chicago Board of Trade show a 30 percent chance the Fed will cut its target rate for overnight lending between banks to zero by the end of December, compared with 25 percent odds a month earlier. The Treasury will announce today plans to sell $39 billion in three-year notes, $20 billion in 10-year debt, $12 billion in 30-year bonds and $7 billion of 10-year Treasury Inflation Protected Securities over four consecutive days next week, according to Wrightson ICAP. The Treasury last sold this combination of securities the week of July 6, when it auctioned $73 billion. That was the first time the department offered four coupon-bearing securities in a single week since it began regular debt sales in 1976. To contact the reporter on this story: Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net.

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