By Lukanyo Mnyanda and Wes Goodman March 8 (Bloomberg) -- Treasury 10-year notes fell, pushing the yield to the highest level in almost two weeks, on concern the government may struggle to find buyers for $74 billion of securities this week as the economy shows signs of recovery. Traders added to bets the Federal Reserve will raise interest rates by September before a report this week that economists say will show consumer confidence improved. Demand for the safest assets waned as France’s President Nicolas Sarkozy said the euro region is ready to help Greece should the nation struggle to fund its budget deficit. “We have supply hitting the Treasuries space,” said David Schnautz, a fixed-income strategist at Commerzbank AG in Frankfurt. “This is obviously something the market has to make room for.” The yield on the benchmark 10-year note climbed 2 basis points, or 0.02 percentage point, to 3.70 percent at 6:58 a.m. in New York, according to BGCantor Market Data. It earlier advanced to 3.71 percent, the highest since Feb. 23. The 3.625 percent security due in February 2020 slipped 5/32, or $1.56 per $1,000 face amount, to 99 3/8. The 30-year bond yield increased 2 basis points to 4.66 percent. The MSCI World Index rose after last week’s 3.3 percent advance, the biggest gain since October. The MSCI Asia Pacific Index of shares gained 1.9 percent, the most in two weeks. Standard & Poor’s 500 Index futures expiring this month were little changed. Flattening Yield Curve Investors should position themselves for a flattening in the yield curve as signs of an economic recovery prompt traders to sell shorter-dated notes, said Schnautz, who forecast that the difference in yield between 2- and 10-year notes will narrow about 45 basis points by the end of June. The spread touched 2.71 percentage points on March 5 as rates on shorter maturities climbed faster than those on longer- term debt. The spread reached a record 2.94 percentage points on Feb. 18. It was at 2.81 percentage points today. Two-year rates tend to track the Fed’s target for overnight lending because of their shorter maturity. Yields on longer-term bonds are more influenced by the size of the government’s debt and the outlook for inflation. The Reuters/University of Michigan index of consumer sentiment for March probably increased to 73.8 from 73.6 in February, according to the median forecast of 48 economists in a Bloomberg News survey. The report is due March 12. “Events this week are tilted towards more bad news for Treasuries,” Ciaran O’Hagan, a fixed-income strategist at Societe Generale SA in Paris, wrote in a client report today. Interest Rates Futures contracts on the CME Group Inc. exchange showed a 45 percent probability that Fed policy makers will raise the target rate for overnight loans between banks by September, up from 31 percent odds a week ago. The Fed’s benchmark has been at a range of zero to 0.25 percent since December 2008. The Treasury is scheduled to sell $40 billion in three-year notes tomorrow, $21 billion in 10-year debt on the following day and $13 billion in 30-year bonds on March 11. The three-year sale ties a record. Greece’s bonds climbed after Sarkozy’s comments, among the strongest by an EU leader to signal the bloc would bail out the nation. Greek Prime Minister George Papandreou’s government last week passed further austerity measures and sold 5 billion euros ($6.8 billion) of debt last week. ‘Fulfill Their Commitments’ “I want to be very clear: if it were necessary, the states of the euro zone would fulfill their commitments,” Sarkozy said yesterday in Paris after a meeting with Papandreou. “There can be no doubt in this regard.” Treasuries are drawing demand from municipal bond investors, who are buying as state and local government finances worsen and the yield advantage for tax-exempt securities evaporates. Local government bonds due in three years with AAA ratings yielded 66 percent of similar-maturity Treasuries last month, about the lowest level since Bloomberg began compiling the data in 2001. If the ratio moves closer to 60 percent, investors in the 38.3 percent federal tax bracket would lose all the benefits of sheltering income that comes from municipal debt. Investors became less bearish on U.S. government debt last week, according to a survey by Ried Thunberg ICAP Inc., a unit of ICAP Plc, the world’s largest inter-dealer broker. The company’s index measuring the outlook for Treasuries through the end of this month rose to 45 for the week ended March 5 from 43 in the prior period. A figure of less than 50 shows investors expect prices to fall. The company, based in Jersey City, New Jersey, interviewed 27 fund managers controlling $1.42 trillion. To contact the reporters on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net

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