By Daniel Kruger and Beth Mellor Dec. 28 (Bloomberg) -- Treasury two-year note yields touched the highest levels since October before the U.S. sells a record-tying $44 billion of the securities, the first of three note sales this week totaling $118 billion. The difference in yields between 2- and 10-year notes was almost the widest ever amid concern President Barack Obama’s attempt to revive economic growth with record spending will keep the deficit at $1 trillion. Reports later in this holiday- shortened week will show the slide in U.S. home prices eased and consumer confidence climbed, according to surveys by Bloomberg. “The concession we’ve had on an outright basis will make the supply a little easier to digest,” said Richard Bryant, senior vice president in fixed income at MF Global Inc. in New York, a broker of exchange-traded futures. “So far this morning volumes are pretty light, participation’s been pretty thin.” Two-year note yields rose two basis points, or 0.02 percentage points, to 0.99 percent at 9:26 a.m. in New York, according to BGCantor Market Data. The yield touched 1.02 percent, the highest level since Oct. 27. The 0.75 percent security due in November 2011 fell 1/32, or 31 cents per $1,000 face amount, to 99 17/32. The security to be sold today yielded 1.06 percent in pre-auction trading. Ten-year note yields touched 3.86 percent, the highest level since Aug. 10. ‘Fiscal Worries’ The last sale of two-year notes in November drew a high yield of 0.802 percent, the lowest ever, and attracted bids for 3.16 times the amount on offer, compared with a bid-to-cover ratio of 3.63 at the October sale. The spread between 2- and 10-year notes, at 2.84 percentage points today, touched a record 2.88 percentage points on Dec. 22. The previous record spread of 2.81 percentage points was set 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. The U.S. will sell $42 billion in five-year debt tomorrow and $32 billion in seven-year securities on Dec. 30. The five- year sale and seven-year offerings equal the all-time highest issues of the securities, set last month. “Fiscal worries are also very much present in the U.S., and higher U.S. yields are also a reflection of such concerns,” said Sebastien Barbe, a Hong Kong-based strategist at Calyon, the investment-banking unit of Credit Agricole SA. 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. ‘Clean Up’ Yields on 10-year notes will climb to 5.5 percent, according to David Greenlaw, chief fixed-income economist at Morgan Stanley in New York. The surge will push interest rates on 30-year fixed mortgages to 7.5 percent to 8 percent, almost the highest in a decade, Greenlaw said. Investors are demanding higher returns on government debt, boosting rates this month by the most since January. Rising borrowing costs risk jeopardizing a recovery from a plunge in the residential mortgage market that led to the worst global recession in six decades. “When you take these kinds of aggressive policy actions to prevent a depression, you have to clean up after yourself,” Greenlaw said in a telephone interview. “Market signals will ultimately spur some policy action, but I’m not naive enough to think it will be a very pleasant environment.” Property, Confidence Property values in 20 metropolitan areas fell 7.1 percent in October from a year earlier, the smallest 12-month drop since 2007, according to the median forecast of economists surveyed by Bloomberg before a report tomorrow from S&P/Case-Shiller. The New York-based Conference Board’s consumer confidence index rose to 53 this month from 49.5 in November, according to a separate survey. The measure reached a record low 25.3 in February. The gap between yields on Treasuries and Treasury Inflation Protected Securities, or TIPS, due in 10 years, a measure of the outlook for consumer prices, was at 2.36 percentage points, after earlier reaching 2.39 percentage points, the most since July 2008. Holders of U.S. Treasuries of all maturities have lost 3.6 percent this year, according to Bank of America Merrill Lynch indexes. An investor survey showed fund managers remained bearish on Treasuries. Ried Thunberg’s index measuring the outlook through the end of March was unchanged at 43. A figure below 50 shows investors expect prices to fall. The company, based in Jersey City, New Jersey, interviewed 22 fund managers controlling $1.301 trillion. To contact the reporters on this story: Daniel Kruger in New York at dkruger1@bloomberg.net; Beth Mellor in London at bmellor@bloomberg.net.

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