Feb. 13 (Bloomberg) -- Treasuries headed for a weekly gain, trimming their worst start to a year in more than two decades, on speculation President Barack Obama’s $789 billion stimulus plan won’t revive consumer spending and the world’s biggest economy.

Traders reduced bets on inflation as Treasury Secretary Timothy Geithner said he needs time to work out the details of his strategy to shore up the financial industry. The difference between rates on 10-year notes and Treasury Inflation Protected Securities, or TIPS, which reflects the outlook among traders for consumer prices, narrowed to 1.16 percentage points from 1.37 percentage points at the start of the week.

“The current level is attractive,” said Tsutomu Komiya, an investor in Tokyo at Daiwa Asset Management Co., a unit of Japan’s second-largest brokerage, which has the equivalent of $108.6 billion in assets. “Obama euphoria seems to be waning.”

Yields on 10-year notes were little changed at 2.79 percent as of 6:55 a.m. in London, according to BGCantor Market Data. The price of the 2.75 percent security maturing in February 2019 fell 1/32, or 31 cents per $1,000 face amount, to 99 22/32.

Ten-year yields declined 21 basis points this week. They will drop to 2.5 percent by the end of March, Komiya said. The rate, which tumbled to a record low of 2.04 percent on Dec. 18, averaged 4.55 percent this decade.

The so-called real yield, which investors get from 10-year notes after inflation, was 2.69 percent, rising from 2.11 percent at the end of 2008. Consumer prices rose 0.1 percent last year, after increasing 4.1 percent in 2007.

Stimulus Concerns

“Equities are suffering from uncertainty in the resolution of the banking crisis,” said Jeffrey Gundlach, the chief investment officer at Los Angeles-based TCW Group Inc. who helps oversee $90 billion in fixed income. “When this happens, there is likely to be a flight to quality,” he said yesterday.

The Standard & Poor’s 500 Index fell 3.8 percent this week.

The economic bill is headed for passage in Congress after lawmakers agreed to trim initial measures from more than $800 billion in new spending and tax cuts. Geithner, who said this week he is working on plans to rescue banks, intends to announce another proposal in coming days to support the housing market, according to a person briefed on the matter.

All that won’t be enough to keep U.S. gross domestic product from contracting 2 percent this year, according to the median of 56 projections in a Bloomberg survey of economists taken Feb. 2 to Feb. 10.

Worst Start

Stock losses and concerns about the stimulus package “are both making Treasuries more attractive,” said William Larkin, a fixed-income portfolio manager at Cabot Money Management in Salem, Massachusetts, which manages $500 million in assets. “There is also the growing estimation about recovery time. The further it gets pushed out, the more positive the reaction about the super- safe haven of Treasuries.”

U.S. government securities are still down 2.2 percent in 2009, the steepest loss at the beginning of a year since at least 1987, based on Merrill Lynch & Co.’s Treasury Master index, whose returns for the period start that year.

Japanese bonds lost 0.4 percent. German debt returned 0.4 percent, Merrill’s indexes show. The extra yield that German two- year notes offer over same-maturity Treasuries narrowed to 40 basis points yesterday, the least in 15 months.

China Banking Regulatory Commission official Luo Ping said holding U.S. government bonds is not the only option for investing reserves, clarifying earlier comments, the China News Service reported.

U.S. debt is one option in addition to gold and other government debt, Luo, head of the training center at the banking regulator, was quoted as saying in an interview with the news agency late yesterday.

Record Sales

If the U.S. government issues too much debt to fund efforts to revive the economy, Treasury holders will suffer losses, he said, according to the Chinese-language report.

China owns $681.9 billion of the $5.75 trillion in U.S. marketable debt, making it the largest overseas holder, Treasury Department data show.

The U.S. sold $67 billion of three-, 10- and 30-year debt this week, a record, to help pay for government spending plans.

At the 30-year auction yesterday, indirect bidders, a class of investors that includes foreign central banks, were awarded 33.9 percent of the securities. The average over the past 10 sales was 27.9 percent.

Yields suggest government and Federal Reserve efforts have yet to restore credit markets to where they were before trading froze last year.

The difference between what banks and the Treasury pay to borrow for three months, the so-called TED spread, narrowed to 0.94 percentage point from 4.64 percentage points in October. The gap averaged 0.27 percentage point from 2002 through 2006, before the credit crisis began in 2007.

Mortgage Rates

The London interbank offered rate, or Libor, for three-month dollar loans, increased to 1.23 percent yesterday from 1.08 percent on Jan. 14.

Average 30-year fixed mortgage rates rose to 5.16 percent in the seven days ended Feb. 12 from 4.96 percent four weeks earlier, according to loan finance company Freddie Mac. Rates are about 2.38 percentage points higher than 10-year Treasury yields, widening from 1.62 percentage points five years ago.

Treasuries shed gains today on speculation Group of Seven finance chiefs meeting in Rome this weekend will call for greater measures to spur economic growth.

“Yields will go up,” said Yasutoshi Nagai, chief economist at Daiwa Securities SMBC Co. in Tokyo, part of Japan’s second- largest brokerage. U.S. gross domestic product will be growing again by the third quarter after shrinking for a few more months, he said.

Confidence among U.S. consumers probably fell in February, economists said before a private report today.

The Reuters/University of Michigan preliminary index of consumer sentiment slid to 60.2, from 61.2 in January, according to the median forecast in a Bloomberg News survey. The decline would be the first in three months and would keep the index near a 28-year-low of 55.3 set in November.

To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.

Last Updated: February 13, 2009 02:21 EST