By Daniel Kruger Nov. 14 (Bloomberg) -- The yield gap between Treasury 2- year notes and 30-year bonds reached the widest since July as the U.S. sold $81 billion in notes and bonds amid speculation the Federal Reserve will keep interest rates near record lows. U.S. debt rose as confidence among U.S. consumers unexpectedly dropped in November. The U.S. budget deficit widened in October, reaching a record for that month. The U.S. is scheduled to announce on Nov. 19 how much it plans to raise in 2-, 5- and 7-year note sales the week of Nov. 23. A Commerce Department report Nov. 16 may show retail sales rose last month. “There have been concerns about long-term fiscal deficits leading to more bond issuance in the long end,” said Alex Li, an interest-rate strategist in New York at Credit Suisse AG, one of 18 primary dealers that trade with the Fed. The 10-year note yield fell eight basis points on the week to 3.45 percent, according to BGCantor Market data. The 3.375 percent security due in November 2019 rose 18/32, or $5.63 per $1,000 face amount, to 99 19/32 from its closing price after the U.S. sold a record $25 billion of the debt on Nov. 10. The two-year note yield reached 0.80 percent, the lowest level since April, and declined four basis points on the week. The difference between 2- and 30-year yields reached 3.59 percentage points on Nov. 12, the most since July, up from 1.91 percentage points at the end of 2008. The Fed began lifting borrowing costs 16 months after the spread reached a top at 3.68 percentage points in 1992 and 11 months after it reached 3.63 percentage points in 2003. ‘Modest’ Recovery Gains in the two-year note may have peaked, according to strategists CRT Capital Group LLC. “The two-year has hit the wall” at a 0.80 percent yield, said David Ader, head of U.S. government bond strategy at CRT Capital Group LLC in Stamford, Connecticut. “We have a high degree of confidence the Fed is not hiking for the next six to nine months. The best of the good news is priced in.” The Fed cut its target for overnight lending between banks to a range of zero to 0.25 percent in December to combat the steepest U.S. economic recession since the 1930s. Chicago Fed Bank President Charles Evans said yesterday recovery will probably be “modest.” “Policy is likely to continue to be appropriate for 2010 and most likely beyond,” Evans told reporters after a speech in Paris. “Unless there are unusual developments, I think the policy is going to be highly accommodative, as it is now, for quite some period of time.” The U.S. sold $40 billion in three-year notes on Nov. 9, $25 billion of 10-year debt on Nov. 10 and $16 billion of 30- year bonds Nov. 12. All amounts were records, as Treasury Secretary Timothy Geithner seeks to lock in near-record-low borrowing costs by lengthening the average due date of the Treasury’s borrowings. ‘No End’ in Sight “Despite the larger issues we’re finding willing buyers,” said Thomas Roth, head of U.S. government bond trading in New York at Dresdner Kleinwort. “From now until the end of the year the bids will be there.” Sales of coupon-bearing Treasuries will increase to $2.38 trillion in the fiscal year that began Oct. 1, from $1.81 trillion in the prior 12 months, primary dealer Goldman Sachs Group Inc. said in a report on Oct. 20. The amounts make some investors say the week’s gains won’t continue. “There’s no end to the Treasury sales in sight,” Tsutomu Komiya, an investor in Tokyo at Daiwa Asset Management Co., which oversees $77 billion as part of Japan’s second-largest brokerage, said on Nov. 12. “Supply will send bond yields higher.” Ten-year yields will rise to 4 percent by the end of 2010, he said. A Bloomberg survey of banks and securities companies projects the figure will be 4.23 percent, with the most recent forecasts given the heaviest weightings. Additional Measures U.S. marketable debt stands at $6.95 trillion after reaching a record $7.01 trillion in September as President Barack Obama borrows unprecedented amounts to fund spending programs. The U.S. budget deficit widened to $176.4 billion last month, compared with a deficit of $155.5 billion in the same month a year earlier, the Treasury said on Nov. 12. It was a record 13th consecutive shortfall and the fifth-largest monthly gap on record, the department said. Obama said Nov. 12 he needs to consider additional measures to spur job creation and will convene business leaders, financial experts and “representatives from labor unions and nonprofit groups” for a forum next month at the White House. The unemployment rate in the U.S. reached 10.2 percent in October, the highest level since 1983, a Labor Department report showed last week. The Reuters/University of Michigan preliminary index of consumer sentiment decreased to 66 from 70.6 last month. Retail sales increased 0.9 percent in October, according to the median estimate of economists in a Bloomberg survey, after declining 1.5 percent the previous month. To contact the reporter on this story: Daniel Kruger in New York at dkruger1@bloomberg.net.

Source