Nov. 2 (Bloomberg) -- Treasuries declined amid signs the economy is recovering from the worst slump since the Great Depression and as the Federal Reserve begins a two-day tomorrow meeting to discuss monetary policy.

Government securities fell as U.S. manufacturing expanded, pending home sales rose and construction spending increased. The Treasury cut its estimate for government borrowing in the current quarter, and will announce the sizes of next week’s quarterly refunding auctions on Nov. 4.

“We are down because there will be a lot of banter back and forth until the FOMC statement comes out about whether the Fed is going to make an adjustment to the language to remove some of the accommodation,” said Thomas Tucci, head of U.S. government bond trading at RBC Capital Markets New York, one of the 18 primary dealers that trade with the Fed. “No one wants to buy going into that.”

The 10-year note yield rose four basis points to 3.43 percent at 4:22 p.m. in New York, according to BGCantor Market Data. The 3.625 percent security maturing in August 2019 fell 11/32, or $3.44 per $1,000 face amount, to 101 20/32.

The U.S. will announce plans to sell $81 billion in notes and bonds at next week’s so-called quarterly refunding, according to the average forecasts of six of the primary dealers that will bid on the three auctions. U.S. officials may also unveil a proposal to revive sales of 30-year Treasury Inflation Protected Securities and end auctions of 20-year inflation- linked debt, the dealers said. The announcement of the debt schedule will be Nov. 4.

‘Grain of Salt’

The Treasury cut its estimate for government borrowing from October through December by 43 percent. Borrowing will total a net $276 billion in this quarter, compared with a previous estimate of $486 billion. The department projects borrowing of $478 billion in the three months to March 31, it said in a statement today in Washington. In the quarter that ended Sept. 30, the Treasury borrowed $393 billion, compared with $406 billion projected three months ago.

Construction spending rose 0.8 percent in September, the biggest gain in a year. The Institute for Supply Management’s factory index rose to 55.7 in October, the highest level since April 2006. The index of signed purchase agreements, or pending home sales, rose 6.1 percent in September after a 6.4 percent gain in August.

“You have to view it with a grain of salt,” said Jay Mueller, who manages about $3 billion of bonds at Wells Fargo Capital Management in Milwaukee. “We are coming out of the worst recession since the Great Depression so on a rate of change basis it might look like booming growth when in reality we are just getting a little better after being terribly sick.”

The U.S. economy shed 175,000 jobs in October, according to the median of economists surveyed by Bloomberg News, before a Labor Department report on Nov. 6.

‘Get Serious’

The Treasury is financing a budget deficit that may exceed $1 trillion for a second straight year, even as the economy starts to recover.

President Barack Obama said the U.S. economy has pulled “back from the brink” and the government must now “get serious” about reducing debt and helping spur job growth.

“We just are not where we need to be yet,” Obama told his Economic Recovery Advisory Board, headed by former Federal Reserve Chairman Paul Volcker.

The U.S. economy expanded 3.5 percent from July through September after shrinking for a year, the Commerce Department reported on Oct. 29. Government securities handed investors a loss of 0.06 percent in October, snapping three months of gains, according to Merrill Lynch & Co.’s U.S. Treasury Master index.

‘Unwind’ Bets

The Fed cut its benchmark rate to a range of zero to 0.25 percent in December and arranged programs to purchase Treasuries and mortgage-backed securities to cap consumer borrowing costs.

Oil prices posted their first annual increase in 13 months. in October, heralding the return of inflation around the globe. The difference between rates on 10-year notes and TIPS, which reflects the outlook among traders for consumer prices, widened to 2.03 percentage points from almost zero at the end of 2008. It is still less than the five-year average of 2.18 percentage points.

Investors should “unwind” bets on two-year notes, primary dealer J.P. Morgan Chase & Co. fixed-income analysts led by Srini Ramaswamy in New York wrote in a report Oct. 30. Two-year yields are below their six-month average of about 1 percent, they said in the report.

‘Reasonably Risk Averse’

Ten-year rates will climb to 4 percent and two-year yields will advance to 1.25 percent by the end of June, according to the report.

A Bloomberg survey of economists projects the figures will be 3.84 percent and 1.68 percent, with the most recent estimates given the heaviest weightings.

The collapse of the U.S. property market in 2007 triggered $1.66 trillion of writedowns and credit losses at banks and other financial institutions and sent the global economy into its first recession since World War II, according to data compiled by Bloomberg.

U.S. banks are buying Treasuries at the fastest pace since just after the last recession as demand for loans declines.

Combined purchases of Treasuries and bonds issued by government-chartered companies such as Fannie Mae rose 18 percent to $1.4 trillion in the 52 weeks through mid-October.

Banks including JPMorgan Chase, Citigroup Inc. and Wells Fargo & Co. are profiting from a steepening yield curve, buying longer-term Treasuries with money acquired at short-term rates kept low by the Fed’s near-zero benchmark.

“Banks will continue to purchase Treasuries for the next several quarters, at least until the end of 2010, as they continue to be reasonably risk averse,” said Ira Jersey, an interest-rate strategist in New York at primary dealer RBC Capital Markets. The demand will help keep 10-year yields below 4 percent through 2010, he said.

To contact the reporters on this story: Cordell Eddings in New York at ceddings@bloomberg.net.

Last Updated: November 2, 2009 16:34 EST