By Susanne Walker and Lukanyo Mnyanda Dec. 22 (Bloomberg) -- Treasuries fell, pushing the 10-year note’s yield to the highest level in four months, as stock-index futures gained even after a report showed the world’s largest economy expanded less than forecast in the third quarter. The difference in yields between 2- and 10-year notes widened to a record for a second day as investors bet the U.S. recovery will fuel inflation and reduce demand at record government debt sales. The 10-year note’s yield increased yesterday the most since August before tomorrow’s announcement of the size of 2-, 5- and 7-year note auctions next week. “At this point, there’s an unwillingness to stand in front of any major moves, so we expect to see choppy price action into the end of the year,” said Ian Lyngen, senior government bond strategist at CRT Capital Group LLC in Stamford, Connecticut. The yield on the benchmark 10-year note rose four basis points, or 0.04 percentage point, to 3.72 percent at 8:34 a.m. in New York, according to BGCantor Market Data. It was the highest level since Aug. 13. The 3.375 percent security due in November 2019 fell 11/32, or $3.44 per $1,000 face amount, to 97 6/32. The two-year note yield gained three basis points to 0.89 percent. The U.S. economy expanded at a 2.2 annual rate from July through September, the Commerce Department said today in Washington, compared with a previously reported 2.8 percent gain. “Twos continue to be anchored because the market expects the Fed to be on hold for the bulk of next year so there’s not a lot of room for twos to sell off,” said Ira Jersey, an interest-rate strategist at RBC Capital Markets in New York, one of 18 primary dealers that trade directly with the Federal Reserve. ‘Inflationary Pressures’ Sales of existing U.S. homes probably rose in November to the highest level in more than two years, economists said before a separate report due at 10 a.m. in Washington. Purchases rose 2.5 percent to a 6.25 million annual rate, according to the median forecast of economists surveyed by Bloomberg News. The spread between 2- and 10-year U.S. Treasury note yields increased to as much as 285 basis points today. Before yesterday, the previous record of 281 basis points was reached on June 5 when Treasuries plunged after a government report showed the smallest decline in U.S. payrolls in eight months. Ten-year note yields touched 4 percent the following week, the highest level in 2009. “If you are going to have a recovery, you are going to have higher inflationary pressures, so the curve should continue to steepen from here,” said Dan Greenhaus, chief economic strategist at Miller Tabak & Co. in New York. “The curve could reach 300 to 325 basis points.” Treasury Sales The difference between yields on Treasury Inflation Protected Securities due in 10 years and nominal notes, a measure of the outlook for consumer prices, climbed to 2.36 percentage points today, the most since July 2008. Bonds dropped even as Greece’s credit rating was cut one step to A2 by Moody’s Investors Service. The rating carries a “negative” outlook, meaning Moody’s is more inclined to cut it again than leave it unchanged or raise it. European stocks gained, sending the Dow Jones Stoxx 600 Index to a five-week high. Asian stocks and U.S. stock-index futures also climbed. The U.S. plans to sell two-year notes on Dec. 28, five-year debt on Dec. 29 and seven-year securities on Dec. 30. The total amount will be $118 billion, according to Wrightson ICAP LLC, an economic advisory firm in Jersey City, New Jersey. President Barack Obama is borrowing unprecedented amounts for spending programs. U.S. marketable debt increased to a record $7.17 trillion in November from $5.80 trillion at the end of last year. Treasuries of all maturities have fallen 3.3 percent this year, while holders of Japanese debt have made a 1.1 percent return, according to Bank of America Merrill Lynch indexes. U.S., Japanese Debt The yield differential between 10-year U.S. and Japanese government debt expanded to 2.45 percentage points today, according to data compiled by Bloomberg. The gap has swelled from 1.02 percentage points at the end of last year. Demand for Treasuries also waned after Chinese central bank Deputy Governor Zhu Min said on Dec. 17 the U.S. can’t expect other nations to increase purchases of Treasuries to fund its fiscal shortfall. “The lack of data in the past 24 hours, thin trading conditions and search for direction or macro themes in 2010, implies the current weakness has been partially influenced by a delayed reaction to Zhu Min’s comments,” said Geoff Howie, an economist and broker at MF Global Singapore Ltd., part of the world’s largest broker of exchange-traded futures and options. To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net; Lukanyo Mnyanda in London at lmnyanda@bloomberg.net.

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