Feb. 4 (Bloomberg) -- Treasury notes fell for a second day as the government said it will auction a record $67 billion in notes and bonds next week, fueling concern it will issue an unprecedented amount of debt this year to spur the economy.

The U.S. will sell $32 billion in three-year notes on Feb. 10, $21 billion in 10-year notes Feb. 11 and $14 billion in 30- year bonds Feb. 12, the Treasury Department said in a statement on its quarterly refunding of long-term debt. The department also said it would auction seven-year notes for the first time since 1993. A report showed service industries contracted in January at a slower pace than forecast.

“Everyone is trying to figure out what we’re going to do with all this paper,” said Thomas Roth, head of U.S. government bond trading in New York at Dresdner Kleinwort, one of the 17 primary dealers required to bid at Treasury auctions.

The benchmark 10-year note yield rose three basis points, or 0.03 percentage point, to 2.91 percent at 4:01 p.m. in New York, according to BGCantor Market Data. The price of the 3.75 percent security due in November 2018 fell 1/4, or $2.50 per $1,000 face amount, to 107 2/32. Five-year note yields increased three basis points to 1.93 percent.

Rates on three-month Treasury bills slipped two basis points to 0.29 percent, still near the highest since Nov. 12, when Congress was debating an automaker bailout amid fears the industry would collapse.

The difference, or spread, between the yields on two- and 10-year notes was 1.94 percentage points, the widest in more than two months.

Budget Deficit

The debt sales are the government’s response to the surging budget deficit. Bond-trading firms told the Treasury this week they expect a $1.6 trillion shortfall in 2009 -- more than triple the record set last year. The Treasury said today it expects to reach the limit of $11.3 trillion for all federal outstanding debt in the first half of this year.

The Institute for Supply Management’s index of non- manufacturing businesses, which make up almost 90 percent of the economy, rose to 42.9 from 40.1 in December. It was forecast to slide to 39 last month, a Bloomberg News survey showed. Readings below 50 signal contraction.

Unemployment likely climbed to 7.5 percent, according to the median estimate in a Bloomberg survey ahead of Labor Department figures due Feb. 6.

The report is “expected to be dismal, so if we got a bounce off that, we wouldn’t be totally surprised,” said Dan Mulholland, a Treasury trader and strategist in New York at RBC Capital Markets, the investment-banking arm of Canada’s biggest bank.

‘Two Forces’

Companies in the U.S. cut an estimated 522,000 jobs in January as the economy weakened at the start of the year, according to another report today, the ADP Employer Services gauge. The total, less than economists forecast, followed a revised cut of 659,000 in December.

“The market is battling with two forces: weak economic news and large refunding expectations,” said Jeffry Feigenwinter, head of Treasury trading at BNP Paribas Securities Corp. in New York, another primary dealer.

Seven-year notes will be issued this month for the first time since 1993, the U.S. said. In November, the Treasury reintroduced three-year notes.

The government said it will move from four 30-year bond auctions a year to eight, selling a new bond every quarter with a reopening a month later. It said it is also considering adding a second reopening of 30-year bonds and weighing “reintroduction or establishment” of other securities.

‘Rollover Risk’

“They want to make sure their debt is spread out along the curve so they don’t face the rollover risk that they would if they issued bills,” said Michael Pond, an interest-rate strategist in New York at primary dealer Barclays Capital Inc.

Karthik Ramanathan, the Treasury’s chief debt manager, said the department will seek to extend the average maturity and duration of its portfolio to reduce its dependence on short-term debt. As short-term bills mature, the Treasury would face the risk of higher interest rates in issuing new debt, Pond said.

Ramanathan said he’s confident demand will be sufficient for Treasury securities to keep borrowing costs contained.

“Our debt-to-GDP ratio is low compared to other G-7 nations, and we believe our capacity is quite high in terms of borrowing,” he said at a briefing for reporters. Marketable debt is about 40.6 percent of the U.S. gross domestic product, according to Bloomberg data.

Corporate Debt

Treasuries of all maturities have lost 3 percent this year, according to Merrill Lynch & Co.’s Treasury Master index, as investors used the specter of more supply to sell government bonds. Corporate debt, by contrast, has gained 1.2 percent, according to another Merrill index.

The risk of U.S. companies defaulting on their debt fell, according to traders of credit-default swaps. Contracts on the Markit CDX North America Investment Grade Index of 125 companies in the U.S. and Canada decreased four basis points to 191, according to broker Phoenix Partners Group in New York. Credit- default swaps are financial instruments based on bonds and loans that are used to speculate on a company’s ability to repay debt.

“The corporate bond market is starting to get to the point where liquidity is coming back,” said William Larkin, a fixed- income portfolio manager at Cabot Money Management in Salem, Massachusetts, which manages $500 million in assets. “That is going to suck some of the life out of the Treasury market.”

To contact the reporters on this story: Dakin Campbell in New York at dcampbell27@bloomberg.net; Susanne Walker in New York at swalker33@bloomberg.net.

Last Updated: February 4, 2009 16:07 EST