By Wes Goodman and Keith Jenkins Feb. 1 (Bloomberg) -- Treasuries fell for the first time in three days amid speculation reports on jobs and manufacturing this week will show the U.S. economy is strengthening as it recovers from the worst recession since World War II. Federal Reserve Bank of St. Louis President James Bullard said the risk of deflation, or a general drop in prices, has “passed,” according to the Financial Times. Fund managers became more bearish on Treasuries through the end of June, according to a weekly survey of investors by Ried Thunberg ICAP Inc., part of the world’s largest inter-dealer broker. “We expect the data releases this week to point to a small improvement in the U.S. economy, which supports higher yields,” said Luca Cazzulani, director of fixed-income strategy at UniCredit SpA in Milan: “Should the payrolls data at the end of the week come above zero, that will confirm this picture.” The yield on the 10-year note rose 3 basis points to 3.62 percent at 10:48 a.m. in London, according to BGCantor Market Data. The 3.375 percent security due in November 2019 fell 7/32, or $2.19 per $1,000 face amount, to 98 1/32. Ten-year yields will climb to 4.19 percent by year-end, according to a Bloomberg survey of financial companies with the most recent forecasts given the heaviest weightings. Jobs, Manufacturing Payrolls rose by 13,000 last month, according to the median estimate of 62 economists surveyed by Bloomberg News before the Labor Department’s Feb. 5 report. The Institute for Supply Management factory index, scheduled for today, will show a sixth month of growth, a separate Bloomberg survey showed. Bullard said the U.S. economic recovery is “on track,” according to the Financial Times article, which was dated yesterday and posted on the newspaper’s Web site. “It will be above-average growth for the first half of 2010 and we’ll probably see some positive jobs growth in the first part of 2010 here,” he was quoted as saying. The Fed has vowed to keep its target for overnight bank lending, now in a range of zero to 0.25 percent, “exceptionally low” for an “extended period,” repeating the pledge in a statement Jan. 27. “If you come off zero and you move up a little bit, it’s still a very easy policy,” Bullard told the Financial Times. Today’s decline in Treasuries marks a reversal from late last week, when investors sought the relative safety of government debt as stocks fell. Bonds Outperform For all the concern that the budget deficit and the supply of debt are incresaing, returns on government bonds beat those on equities and commodities so far this year. Sovereign securities from the U.S. to Australia gained 0.68 percent on average in January, including reinvested interest, according to indexes from Bank of America Corp’s Merrill Lynch init. That compares with a loss of 4.11 percent for the MSCI World Index of stocks and a decline of 3.89 percent in the Standard & Poor’s GSCI Index of 24 raw materials. Investors expected another losing year after bonds posted the worst returns in a decade in 2009 amid record debt sales to fund efforts to pull the global economy out of the recession. Instead, the securities were January’s winners on growing concern the recovery will slow after China clamped down on borrowing, the Obama administration proposed limiting the size of banks and Greece’s finances roiled European markets. “We’re going through an air-pocket of risk aversion,” said Jack McIntyre, a fund manager who oversees $21 billion of international debt at Brandywine Global Investment Management in Philadelphia. “Our core view is bonds still have value.” Spread Widens The difference between yields on 10-year notes and Treasury Inflation Protected Securities, or TIPS, a gauge of trader expectations for consumer prices, was 2.32 percentage points, versus the five-year average of 2.17 percentage points. Ried Thunberg’s survey shows most money managers are bearish on Treasuries. The company’s index measuring the market outlook through June fell to 42 for the seven days ended Jan. 29 from 43 the week before. A figure less than 50 shows investors expect prices to fall. The company, in Jersey City, New Jersey, interviewed 26 fund managers controlling $1.42 trillion. Investors should hold fewer two-year notes than the percentages in the benchmarks they use to gauge performance, analysts at JPMorgan Chase & Co. led by Srini Ramaswamy in New York said in a report dated Jan. 29. Two-year yields tend to follow what the Fed does with its target for overnight lending because of their short maturities, while longer-term securities are more influenced by inflation and the size of the government debt. “The onset of Fed tightening -- while still far away --is steadily drawing closer,” the report said. Futures contracts on the Chicago Board of Trade show traders see an 17 percent chance the Fed will increase its target rate by a quarter percentage point by June, dropping from 54 percent a month ago. To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net or Keith Jenkins in London at kjenkins3@bloomberg.net

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