By Susanne Walker and Matthew Brown Jan. 6 (Bloomberg) -- Treasury two-year notes fell for the first time in three days after a private report showed companies in the U.S. cut 84,000 jobs in December, the smallest since March 2008. Two-year note yields rose from near the lowest level in over a week as Bill Gross, who runs the world’s biggest debt fund at Pacific Investment Management Co., said German bunds may offer an alternative to U.S. debt. Service industries in the U.S. expanded in December for the third time in four months, economists said before a report today. “I’m worried about stronger economic data and the fact that we may have to revisit the recent high yields of 3.90 percent on the 10-year,” said Thomas L. di Galoma, head of U.S. rates trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors. “There will be a break in the rally over the next couple of days.” The two-year note yield rose three basis points, or 0.03 percentage point, to 1.04 percent at 8:21 a.m. in New York, according to BGCantor Market data. The yield touched 1 percent yesterday, the lowest level since Dec. 28. The 1 percent security due in December 2011 fell 2/32, or 63 cents per $1,000 face amount, to 99 29/32. Ten-year note yields rose 1 basis point to 3.77 percent. Shorter maturities, which tend to track the Federal Reserve’s benchmark interest rate, are more attractive because the central bank has promised to keep borrowing costs down, said Tsutomu Komiya, who handles Treasuries in Tokyo at Daiwa Asset Management Co., which oversees the equivalent of $77 billion. Fed Minutes The Fed is scheduled to release the minutes from its Dec. 15-16 meeting today. Fed Chairman Ben S. Bernanke and his colleagues reiterated a pledge to keep the target rate at almost zero at the session. The Tempe, Arizona-based Institute for Supply Management’s index of non-manufacturing businesses, which account for almost 90 percent of the economy, rose to 50.5 in December from 48.7 in the previous month, according to the median estimate of 67 economists in a Bloomberg News survey. After rallying 14 percent in 2008, when credit markets froze, Treasuries fell 3.7 percent on average last year, based on indexes compiled by Bank of America Merrill Lynch. Investors shunned government debt while the U.S. raised a record $2.11 trillion selling securities amid signs that the worst economic slump since World War II is ending. Gross, in an interview with Time magazine published on its Web site yesterday, said there are a number of reasons to “have doubts” about Treasuries. Gross on Demand “I’d be careful about this continuing assumption that U.S. Treasuries are the place to go,” said Gross, who is based in Newport Beach, California. Demand from China, the largest overseas owner of U.S. debt, may wane, he said. “We would probably try and substitute for our Treasuries with sovereign bonds of potentially higher quality,” Gross told Time. “Germany has problems, but it’s in a much better budget situation than the U.S. because of a constitutional amendment three months ago that forces a balanced budget in four years.” German bonds returned 1.96 percent in 2009 while Treasuries fell, the Merrill Lynch indexes show. Investors are demanding 39 basis points of extra yield to buy 10-year Treasuries instead of same-maturity German bunds. The spread was 49 basis points on Dec. 22, the widest level since July 2007. The U.S. plans to sell 3- and 10-year notes, 30-year bonds and 10-year Treasury Inflation Protected Securities next week. Buyers Back Treasuries offer value after 10-year yields rose 64 basis points in December, the most in almost six years, said Andy Cossor, Hong Kong-based chief market strategist for Asia at Frankfurt-based DZ Bank, Germany’s fifth-largest lender. “Buyers have come back,” Cossor said. “The level of yields is attractive. The Fed is in no hurry to raise rates, and you’ve still got low inflation.” Ten-year yields will fall to 3.7 percent in three months, he said. The difference between yields on 10-year notes and Treasury Inflation Protected Securities, or TIPS, a gauge of trader expectations for consumer prices, widened to 2.38 percentage points from 0.29 percentage points a year ago. To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net; Matthew Brown in London at mbrown42@bloomberg.net.

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