Treasuries dropped, paring yesterday’s biggest gain in almost three weeks, after U.S. President Barack Obama said he’ll agree to a two-year extension of all Bush-era tax cuts. Longer-maturity debt led the decline as Obama’s plan would also see the payroll tax cut by 2 percentage points, helping support the recovery and reduce demand for the safety of debt. Treasuries extended losses before reports this week that economists said will show fewer Americans filed claims for unemployment benefits and consumer confidence rose. “Obama’s comments are likely aimed at underpinning U.S. economic growth,” said Kenichiro Ikezawa, who helps oversee about $56 billion of assets as a Tokyo-based fund manager at Daiwa SB Investments Ltd., a unit of Japan’s second-biggest brokerage. “This is negative for Treasuries, especially for the long end.” The yield on the benchmark 10-year note climbed five basis points to 2.97 percent as of 6:33 a.m. in London, according to BGCantor Market Data. The 2.625 percent security due November 2020 dropped 13/32, or $4.06 per $1,000 face amount, to 97 1/32. Thirty-year yields rose four basis points to 4.28 percent. Obama said he would accept a lower rate for the estate tax than Democrats wanted in order to break a stalemate over extending the Bush tax cuts before Congress adjourns. The current tax rates, enacted in 2001 and 2003, are set to expire Dec. 31. Without the compromise, middle-income families would become “collateral damage for political warfare here in Washington,” Obama said in televised remarks. ‘Deficit Problem’ “The tax cuts may help increase consumer spending but the flipside to this is that the U.S. deficit problem will continue,” said Zeal Yin, who invests in dollar-denominated debt in Taipei at Shin Kong Life Insurance Co., Taiwan’s second- largest life insurer, which manages about $50 billion. “While prices may be supported by possible safety bids in the short term, you have got to underweight the market over one year.” Ten-year yields may rise as high as 4 percent over the next 12 months, he said. Jobless claims declined by 11,000 to 425,000 in the week ended Dec. 4, according to a Bloomberg News survey before the Labor Department report on Dec. 9. The Thomson Reuters/University of Michigan preliminary index of consumer sentiment rose to 72.5 in December from 71.6 the prior month, a separate Bloomberg survey showed before the Dec. 10 report. Europe Concerns Losses in Treasuries were tempered on speculation European policy makers will fail to agree on how to contain the 16-nation region’s debt crisis. European finance ministers yesterday ruled out immediate aid for Portugal and Spain or an increase in the 750 billion- euro ($997 billion) crisis fund. European Central Bank Governing Council member Nout Wellink said yesterday it is not the central bank’s task to rescue euro-area countries with funding problems. “The Europeans are muddling along instead of providing conclusive support to Ireland and the rest of the peripheral countries,” said Marc Fovinci, who helps oversee $2.7 billion as head of fixed income at Ferguson Wellman Capital Management Inc. in Portland, Oregon. “That does nothing but create uncertainty, and provides a flight to quality.” U.S. government debt has handed investors a 7.3 percent return this year, according to Bank of America Merrill Lynch indexes. German debt has gained 6.7 percent, the indexes show. Treasuries gained yesterday, with 10-year yields falling nine basis points, after Federal Reserve Chairman Ben S. Bernanke said the central bank may boost debt purchases to support the economy. Debt Sales Treasuries also weakened today before the government sells $66 billion of notes and bonds this week. The U.S. will auction $32 billion of three-year securities today, $21 billion of 10- year debt tomorrow and $13 billion of 30-year bonds on Dec. 9. The three-year debt to be sold today yielded 0.76 percent in pre-auction trading, compared with 0.575 percent at the previous sale of the securities on Nov. 8. Investors bid for 3.26 times the amount offered last month, compared with 2.95 at the October auction. The yield on the 10-year note will end next year at 3.23 percent, according to the average forecast in a Bloomberg News survey of banks and securities companies with the most recent estimates given the heaviest weightings. To contact the reporter on this story: Ron Harui in Tokyo at rharui@bloomberg.net To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net.

Source