Treasuries fell and traders added to bets inflation will pick up as the economy expands, pushing a gauge of expectations for costs in the U.S. to a 30-month high. The difference between yields on two-year notes and Treasury Inflation Protected Securities, which tracks the outlook for consumer prices over the life of the securities, expanded to 1.97 percentage points, the widest since July 2008. Bonds also eroded a weekly gain as the U.S. prepared to sell $99 billion of debt in three auctions next week. “The best is over for Treasuries,” said Hiroki Shimazu, an economist in Tokyo at Nikko Cordial Securities Inc., a unit of Sumitomo Mitsui Financial Group Inc., Japan’s third-largest publicly traded bank by assets. “The U.S. economy will not enter into deflation.” The 10-year yield climbed two basis points to 3.60 percent as of 2:24 p.m. in Tokyo, according to BGCantor Market Data. The 3.625 percent note maturing in February 2021 dropped 5/32, or $1.56 per $1,000 face amount, to 100 1/4. The rate has risen from 2010’s low of 2.33 percent set Oct. 8. The yield will advance to 3.94 percent by year-end, according to a Bloomberg survey of banks and securities companies with the most recent forecasts given the heaviest weightings. Shimazu predicts 3.70 percent. Quicker Inflation Increasing demand for food and fuel pushed up the U.S. cost of living more than forecast in January. The consumer-price index advanced 0.4 percent for a second month, the Labor Department said yesterday. The Citigroup Economic Surprise Index rose to 72.1, its highest level since September 2008, indicating U.S. economic data are stronger than analysts predicted by the largest degree in 29 months. The government plans to sell $35 billion in two-year notes on Feb. 22, the same amount of five-year debt the following day, and $29 billion in seven-year securities on Feb. 24. Treasuries still headed for a weekly gain after advancing yesterday as protests in the Middle East bolstered demand for the relative safety of government debt. Bahrain’s army fired teargas shells, buckshot and rubber bullets to quell an uprising by pro-democracy protesters, as unrest spread across the region. “The uncertainty and geopolitical risks are supportive of Treasuries,” said Sergey Bondarchuk, an interest-rate strategist in New York at BNP Paribas, one of 20 primary dealers that trade Treasuries with the Federal Reserve. Fed Buying The central bank is scheduled to buy $5 billion to $7 billion of Treasuries maturing from August 2013 to February 2015 today as part of its efforts to sustain the expansion. The Fed announced in November it would pump $600 billion into the economy via debt purchases by June 30. Bond bulls say they question whether the current pace of economic growth, 3.2 percent in the fourth quarter of last year, can continue once the Fed stops buying. “Yields will reach their high for the year in the first quarter,” said Sungjin Park, chief debt investment officer in Seoul at Samsung Asset Management Co., the nation’s largest private bond investor. “It won’t be easy to achieve a robust recovery.” Park, who oversees the equivalent of $55.7 billion in debt, said he is favoring longer-term Treasuries. Gross-domestic-product growth will quicken to 3.2 percent in 2011 from 2.9 percent for all of 2010, according to a Bloomberg survey of banks and securities companies. Fed Minutes Central bank policy makers took a more optimistic view of the economy last month while maintaining their dissatisfaction with job growth, minutes of their January policy meeting released this week showed. The Fed cut its benchmark to a band of zero to 0.25 percent in December 2008 and has pledged to keep it low for an “extended period.” Thirty-day federal funds futures contracts for delivery in February 2012 yielded 0.52 percent, indicating investors see the central bank raising borrowing costs by then. “Fed tightening will start much later and happen much more slowly than is priced into” yields, Michael Cloherty, head of U.S. rates strategy at RBC Capital Markets LLC, and Keith Blackwell, an associate rates strategist at the company, wrote in a report yesterday. “The market will begin to back away from rapid tightening expectations in the coming weeks,” they wrote. RBC is one of the 20 primary dealers that are required to bid at the government debt sales. Treasuries have handed investors a 1 percent loss in 2011, according to indexes compiled by Bank of America Merrill Lynch, on signs of growth including a decline in the jobless rate to a 21-month low of 9 percent. TIPS fell 1.2 percent and index of bonds around the world lost 0.6 percent, the Bank of America indexes show. The MSCI All Country World Index of stocks returned 5.3 percent in the period. To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net. To contact the editor responsible for this story: Nicholas Reynolds at nreynolds2@bloomberg.net.

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