By Susanne Walker and Paul Dobson Dec. 7 (Bloomberg) -- Treasury two-year notes advanced, snapping four days of losses, on speculation Federal Reserve Chairman Ben S. Bernanke may try to damp optimism about the strength of the economic recovery in a speech today. Two-year note yields surged Dec. 4 after a Labor Department report showed the jobless rate in the U.S. unexpectedly declined last month. The world’s largest economy will sell $74 billion in notes and bonds this week. Bernanke said last month that economic “headwinds” will probably keep interest rates near record lows for an extended period. “With the new information on Friday, while the headlines were a bit daunting for the double-dip camp, they don’t provide any conclusive read the economy is in full recovery mode,” said Ian Lyngen, senior government bond strategist at CRT Capital Group LLC in Stamford, Connecticut. The benchmark two-year note yield fell two basis points to 0.81 percent at 9:17 a.m. in New York, according to BGCantor Market Data. The 0.75 percent security due November 2011 rose 1/32, or 31 cents per $1,000 face amount, to 99 7/8. The yield gained as much as 14 basis points on Dec. 4, the most since August. The Treasury will auction $40 billion of 3-year notes tomorrow, $21 billion of 10-year securities on Dec. 9 and $13 billion of 30-year bonds on Dec. 10. Bernanke is due to speak today at a lunch hosted by the Economic Club of Washington, after Labor Department reports on Dec. 4 showed the unemployment rate fell to 10 percent and employers cut 11,000 jobs in November, compared with a median forecast of 125,000 positions in a Bloomberg survey. Fed policy makers meet next week to discuss interest rates and the economy. Buying Opportunity “Bernanke’s speech today is the big event,” said William O’Donnell, U.S. government bond strategist at RBS Securities Inc. in Stamford, Connecticut, one of 18 primary dealers that trade with the Fed. “People are looking for any hints of a change in the Fed’s outlook with response to timing and what will be said at the FOMC.” Treasury declines last week that were fueled by the better- than-forecast jobs data created a buying opportunity because the Federal Reserve isn’t ready to raise interest rates, UniCredit SpA analysts said in an investor report today. “Stronger-than-expected non-farm payrolls pushed yields strongly up,” a team led by Michael Rottmann, head of fixed- income research in Munich, wrote in today’s report. “However, we do not expect such data to lead the Fed to change its current monetary policy stance. Consequently, at current levels, 10-year yields appear cheap in the U.S.” Futures Contracts The Fed on Nov. 4 repeated it will keep interest rates near zero for “an extended period” and specified for the first time that policy will stay unchanged as long as inflation expectations are stable and unemployment fails to decline. Traders boosted wagers the central bank will begin lifting its target rate for overnight loans next year. Federal-funds futures contracts on the Chicago Board of Trade show an 18 percent probability the Fed will increase the target rate to at least 0.5 percent by March, up from 11 percent odds a week ago. For an increase at the June meeting of the Federal Open Market Committee, the probability rose to 51 percent from 32 percent a week ago. A survey of investors by Ried, Thunberg & Co. showed fund managers turned more bearish on Treasuries. The company’s index measuring the outlook through the end of March fell to 42 after the payrolls data, from 43 before. A figure below 50 shows investors expect prices to fall. Lucrative Gilts The company, based in Jersey City, New Jersey, interviewed 25 fund managers controlling $1.33 trillion. U.S. government bonds lost 2.4 percent this year after returning 14 percent in 2008, the most this decade, according to indexes compiled by Bank of America Merrill Lynch. The world’s biggest bond investors say U.K. gilts may prove more lucrative than Treasuries for a second straight year in 2010 as purchases by banks offset record borrowing by Chancellor of the Exchequer Alistair Darling. Gilts have handed investors a return of 0.35 percent so far this year. BlackRock Inc., Charteris Portfolio Managers and Pacific Investment Management Co., which together oversee $2.4 trillion, are buying gilts on speculation the Bank of England will be among the last central banks to raise interest rates as economies around the world recover from the first global recession since World War II. ‘Daunting Number’ Strategists are slashing forecasts for U.K. 10-year bond yields, even as they boost estimates for U.S. and German rates, according to data compiled by Bloomberg. That may support demand as the government, which must call an election by June, increases borrowing 94 percent to 175 billion pounds ($287 billion) in the year ending March 31. “It sounds a big, daunting number, but I think when push comes to shove it would be quite easy to finance,” said Ian Williams, the chief executive officer of Charteris, which runs the top-performing fund for U.K. government bonds, according to data compiled by research firm Lipper. “The Bank of England has bought so many gilts back from the market that, in a recession, bizarrely, you could have a shortage.” To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net. Paul Dobson in London at pdobson2@bloomberg.net

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