Jan. 5 (Bloomberg) -- Treasuries rose and yields approached a two-week low as the Federal Reserve prepared to buy long-term debt today, after saying improvements in the economy fell short of what’s needed to scale back its bond-purchase program. Vincent Reinhart, who was the Fed’s chief monetary-policy strategist from 2001 until September 2007, said unemployment may lead the central bank to extend its purchases beyond its current plan to scoop up $600 billion of debt. The Fed is scheduled to buy $1.5 billion to $2.5 billion of Treasuries due from August 2028 to November 2040 today, according to its website. “Treasuries offer safety,” said Kazuaki Oh’e, a debt salesman in Tokyo at Canadian Imperial Bank of Commerce, the North American nation’s fifth-largest lender. “There are still risks in the economy.” Ten-year yields declined two basis points to 3.31 percent as of 2:09 p.m. in Tokyo, according to data compiled by Bloomberg. The price of the 2.625 percent security due in November 2020 rose 5/32, or $1.56 per $1,000 face amount, to 94 1/4. The rate fell to 3.28 percent on the last day of 2010, which was the lowest level since Dec. 20. Yields will drop to 3.17 percent by March 31, according to a Bloomberg survey of banks and securities companies, with the most recent forecasts given the heaviest weightings. Fed officials arranged their second round of quantitative easing, known as QE2, in November as the U.S. unemployment rate held near 10 percent. QE3 Possibility “They want to be absolutely confident that the economy gets better,” Reinhart said today on Bloomberg Television’s “First Up” with Susan Li. “They’re going to have to make decisions in April and May about QE3, and they’re not going to get a whole lot of a different picture than they have right now.” Reinhart in a Dec. 27 interview said there is a chance the Fed will extend its bond purchases. Fed officials affirmed their pledge to purchase $600 billion in Treasury securities through June. “While the economic outlook was seen as improving, members generally felt that the change in the outlook was not sufficient to warrant any adjustments to the asset-purchase program,” the Fed said in minutes of its Dec. 14 policy meeting, released yesterday in Washington. The danger of the Fed plan is that it will increase prices for goods and services, said Tsutomu Komiya, who handles U.S. debt in Tokyo for Daiwa Asset Management Co., which oversees the equivalent of $105 billion and is part of Japan’s second-biggest brokerage. ‘Cheap Money’ “I’m bearish,” he said. “We have cheap money and that is raising inflation concerns.” Ten-year yields will climb to 3.6 percent by the end of March, he said. The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the securities, widened to 2.34 percentage points. The spread is approaching the high of 2.36 percentage points set Dec. 16, which was the most since May. Investors added to bets on inflation before industry reports today that economists said will show growth in jobs and service industries. U.S. employment rose by 100,000 in December, the most since November 2007, according to a Bloomberg survey of economists before ADP Employer Services reports the figure. The Institute for Supply Management non-manufacturing index, which covers 90 percent of the economy, rose to 55.7 in December, the highest since May 2006, a separate survey showed before today’s data. Buffett Speculation Berkshire Hathaway Inc.’s decision to sell $1.5 billion of mostly fixed-rate debt earlier this week raised speculation that Warren Buffett, the company’s billionaire chief executive officer, expects interest rates to rise. “The market scrutinizes Buffett’s moves very closely and this would indicate he’s thinking interest rates in the longer term may go up,” Vijay Chander, Hong Kong-based head of credit strategy at Standard Chartered Plc, said in an interview. An index of Treasuries due in more than a year handed investors a 1 percent loss in the past month, according to figures compiled by Bloomberg and the European Federation of Financial Analysts Societies. Of 26 markets, only Spain, Italy, Greece and Portugal lost more as governments in those nations try to convince investors they can control spending. The Fed should complete its planned $600 billion of bond purchases, said former central bank Governor Randall Kroszner, speaking yesterday with Carol Massar and Matt Miller on Bloomberg Television’s “Street Smart.” “Going through with the rest of QE2 makes a lot of sense,” he said. “I just don’t see the unemployment rate coming down very much over the next six months.” --With assistance from Sarah McDonald in Sydney and Katrina Nicholas in Singapore. Editors: Jonathan Annells, Rocky Swift. To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net. To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net.

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