By Lukanyo Mnyanda Dec. 21 (Bloomberg) -- Treasuries declined for a second day on speculation that an accelerating economic recovery will fuel inflation, while rising stock markets reduced demand for bonds’ relative safety. The drop pushed the 10-year yield to within four basis points of the highest level since August as the MSCI World Index of stocks snapped two days of losses. Bonds slipped before reports this week that economists say will show U.S. gross domestic product expanded in the third quarter and consumer spending grew. “We could see more growth prospects being factored into the market, and that will put pressure on Treasuries,” said Peter Chatwell, a fixed-income strategist in London at Calyon, the investment-banking arm of Credit Agricole SA. The 10-year yield may rise above 4 percent by the end of March, he said. The yield on the benchmark 10-year note climbed 4 basis points to 3.58 percent as of 7:13 a.m. in New York, according to BGCantor Market Data. The yield climbed to 3.62 percent on Dec. 15, the highest level since Aug. 13. The 3.375 percent security due November 2019 fell 11/32, or $3.44 per $1,000 face amount, to 98 9/32. The yield fell 1 basis point last week. The two-year yield rose 3 basis points to 0.82 percent. The moves left the yield difference, or spread, between the securities at 276 basis points today, from 253 basis points at the end of last month, according to data compiled by Bloomberg. It widened last week to the most since June 5 as investors bought shorter-dated notes on speculation policy makers will keep interest rates at a record low. The target rate for overnight loans is at a range of zero and 0.25 percent. Spending Report A Commerce Department report on Dec. 23 will show consumer spending rose 0.7 percent in November, the same as the previous month, according to the median estimate of 60 economists in a Bloomberg survey. The National Association of Realtors will probably say tomorrow that purchases of existing homes rose in November to an annual pace of 6.25 million, the highest level since February 2007, according to a separate survey. “Household spending appears to be expanding at a moderate rate,” the Federal Open Market Committee said in a statement on Dec. 16 after its meeting. Interest rate futures show a 44 percent chance the Fed will raise the rate by June, from 31.4 percent odds a month ago. European stocks gained, propelling the Dow Jones Stoxx 600 Index toward its steepest annual increase in a decade. Futures on the S&P 500 expiring in March added 0.3 percent. Treasury bears say yields are likely to climb as rising commodity prices spur concern inflation will increase in the coming months. A survey of investors by Ried, Thunberg & Co. showed fund managers remained bearish on Treasuries. Copper Gains Ried Thunberg’s index measuring the outlook through the end of March was little changed at 43, from 42 last week. A figure below 50 shows investors expect prices to fall. The company, based in Jersey City, New Jersey, interviewed 22 fund managers controlling $1.39 trillion. Copper for three-month delivery gained 1.1 percent today, extending a 0.2 gain from last week. Oil prices also climbed last week after Iraq’s National Security Council said that Iran violated their shared border and Iraq’s “territorial integrity.” Yield Gap The gap between yields on Treasuries and so-called TIPS due in 10 years, a measure of the outlook for consumer prices, closed above 225 basis points for four days last week, the longest stretch since August 2008. That’s the low end of the range in the five years before Lehman Brothers Holdings Inc. collapsed, and shows traders expect inflation rather than deflation in coming months, said Jay Moskowitz, head of TIPS trading at CRT Capital Group LLC in Stamford, Connecticut. Fed Chairman Ben S. Bernanke has cited a tame inflation outlook for keeping the target interest rate for overnight loans between banks at a record low range of zero to 0.25 percent. TIPS show the improving economy may change sentiment and spark further bond declines. Yields on the benchmark 10-year Treasury note reached a four-month high of 3.62 percent last week. “It could be an environment where we see 4 percent on 10- year yields, which we think is probably likely in the near term,” said Carl Lantz, an interest-rate strategist in New York at Credit Suisse Group AG, one of the 18 primary dealers of U.S. government securities that trade with the Fed. The 10-year breakeven rate was little changed at 230 basis points today. It was 9 basis points on the last trading day of 2008. A basis point is 0.01 percentage point. To contact the reporter on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net

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