Dec. 1 (Bloomberg) -- Treasury 10-year notes fell the most in almost two months as stocks rose and Dubai World said its debt talks are “constructive,” reducing demand for the relative safety of government securities.

Ten-year yields surged as the Institute for Supply Management’s index of new orders improved to 60.3 from 58.5 in November. Treasuries have lost 1.1 percent in 2009, heading for their first losing year in a decade, amid signs the global economy is recovering from the worst slump since World War II, according to indexes compiled by Bank of America Merrill Lynch.

“With improvement in the Dubai situation, the ISM data coming in better than expected and stocks and gold performing so well, Treasuries took a back seat,” said Kevin Giddis, head of fixed-income sales, trading and research at brokerage firm Morgan Keegan Inc. in Memphis, Tennessee.

The yield on the 10-year note rose eight basis points, or 0.08 percentage point, to 3.28 percent at 4:38 p.m. in New York, according to BGCantor Market Data. That’s the most since it gained 13 basis points on Oct. 9. The 3.375 percent security maturing in November 2019 fell 23/32, or $7.19 per $1,000 face amount, to 100 3/4. The yield touched 3.15 percent on Nov. 27, the lowest level since Oct. 2.

Yields on two-year notes rose two basis points to 0.68 percent. The difference between 2- and 10-year note yields touched 2.61 percentage points, the highest level in over a week.

Build America Bonds

Government-related Dubai World said it began talks with banks to restructure $26 billion of debt. The holding company is seeking to delay payments on less than half its $59 billion of obligations. The company’s attempt to delay debt payments roiled markets last week, pushing two-year note yields to their lowest level in 11 months.

The MSCI World Index of shares rose 2 percent, while the Standard & Poor’s 500 Index gained 1.2 percent. Gold for February delivery gained for the 11th time in 12 days in New York, touching a record $1,204 an ounce.

Longer-term Treasuries declined amid hedging related to Build America Bond debt issuance. Massachusetts, the U.S. state with the second highest tax-supported debt per capita after Connecticut, boosted its offering of Build America Bonds to fund public works by 91 percent to $965.5 million today. The sale comprised taxable, federally subsidized debt due in December 2039 and January 2030.

“There has been a direct correlation to pricing of BABS bonds and the long end trading off on those days these securities are priced,” 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 Federal Reserve.

Real Interest Rates

As companies sell debt, they enter into so-called rate lock agreements, in which they bet on Treasury prices falling to guard against higher yields. Once the debt is sold, the bets are ended.

Yields on Fannie Mae and Freddie Mac mortgage securities rose the most in almost two months to the highest in a week, signaling that borrowing costs may rise.

Yields on Washington-based Fannie Mae’s current-coupon 30- year fixed-rate mortgage bonds climbed 0.14 percentage point to 4.04 percent as of 3:43 p.m. in New York, the highest since Nov. 23, according to data compiled by Bloomberg.

Philadelphia Fed Bank President Charles Plosser said the central bank should increase its main interest rate in the future in line with market rates, which will rise with the strengthening of the U.S. economy.

“To conduct monetary policy we need to be forward-looking and, looking ahead, I see an economy that will be growing over the next two years, which means real interest rates will be rising,” Plosser said. “As they do, the federal funds rate should be permitted to rise with them.”

Debt Sales

The economy will expand “about 3 percent” from the fourth quarter of this year to the fourth quarter of 2010, and at a “similar” pace in 2011, Plosser told business leaders today in Rochester, New York. Such growth is faster than the economy’s underlying trend of 2.75 percent, which means investors will push market interest rates up to compensate for the risks of higher inflation, he said.

The Institute for Supply Management’s manufacturing index fell to 53.6, lower than forecast, from October’s three-year high of 55.7, according to the Tempe, Arizona-based group. Readings above 50 signal expansion.

“When you look into the ISM data, you see inflation is still a non-issue, which is giving the Fed room to leave rates at these levels for an extended period,” said Larry Milstein, managing director in New York of government and agency debt trading at RW Pressprich & Co., a fixed-income broker and dealer for institutional investors. “Clearly that’s keeping a bid in the short end of the market in addition to investors’ window dressing and booking profits.”

The U.S. is scheduled to announce in two days how much it plans to raise in the sale of three-year notes on Dec. 8, 10- year notes on Dec. 9 and 30-year bonds on Dec. 10.

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

Last Updated: December 1, 2009 16:59 EST