Feb. 7 (Bloomberg) -- Treasuries fell for a third straight week after the government’s announcement of a record $67 billion in note and bond sales overshadowed the biggest monthly decline in payrolls since 1974.

Yields on the benchmark 10-year note touched the highest in more than two months as the government set the auctions for next week and concern mounted that debt sales will damp demand. President Barack Obama lobbied lawmakers to pass his economic recovery plan, which may cost about $900 billion. Treasuries lost money this year amid concern government borrowing will skyrocket.

“Supply accommodation is the one thing that has been driving the market over the last week,” said David Ader, head of U.S. interest-rate strategy at Greenwich, Connecticut-based RBS Greenwich Capital Markets, one of 17 primary dealers that trade with the Federal Reserve. “It will be the story for the week to come, and the next couple of weeks. The market is nervous about the auctions and anxious about buyers.”

The 10-year note’s yield rose 14 basis points, or 0.14 percentage point, this week to 2.99 percent, according to BGCantor Market Data. It touched 3 percent yesterday, the most since Nov. 28. The price of the 3.75 percent security due in November 2018 tumbled 1 1/4, or $12.50 per $1,000 face amount, to 106 13/32. Yields on the two-year note rose five basis points. They touched 1 percent yesterday, near the highest since Dec. 8.

The difference between yields on notes maturing in two and 10 years touched 2 percentage points yesterday. That was the widest since Nov. 24, after the U.S. said it would rescue Citigroup Inc. with an injection of capital and guarantees for troubled assets. The gap was 1.25 percentage points on Dec. 26.

‘Tug of War’

The unemployment rate rose to 7.6 percent in January from 7.2 percent the previous month, and U.S. companies eliminated 598,000 jobs, the biggest monthly decline since December 1974, the Labor Department said yesterday. Initial claims for unemployment benefits increased to 626,000 last week, a 26-year high, the department said Feb. 5.

“You have the tug of war between supply on one hand, and value and bad news on the other hand,” said Hicham Hajhamou, a trader at BNP Paribas in New York, another primary dealer.

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 Feb. 4 in a statement on its quarterly refunding of long-term debt.

The department will issue seven-year notes later this month for the first time since 1993, and plans to boost the frequency of 30-year bond sales, the Treasury said. Officials are weighing the “reintroduction or establishment” of other securities.

Budget Shortfall

The government will need to auction $493 billion in debt this quarter, 34 percent more than initially projected, the Treasury said on Feb. 2. It will probably borrow as much as $2.5 trillion during the fiscal year ending Sept. 30, compared with $892 billion in notes and bonds it sold the prior 12 months, according to primary dealer Goldman Sachs Group Inc.

The sales are the government’s response to a surging budget shortfall. Treasury’s primary dealers projected a $1.6 trillion deficit for 2009, according to the results of a survey released Feb. 2. That’s more than triple the record set last year.

Treasury Secretary Timothy Geithner will unveil the administration’s financial-recovery plan in a speech Feb. 9. The effort aims to shore up banks and restart lending to households and businesses.

Corporate Bonds

U.S. securities lost 3.1 percent this year, Merrill Lynch & Co.’s Treasury Master index showed, as investors purchased riskier assets on concern debt sales may reach unprecedented levels. Corporate debt gained 1.4 percent this year, according to another Merrill Lynch index.

Companies sold $20.4 billion of bonds this week, compared with $35.8 billion a week earlier, Bloomberg data show. Sales this year total about $167.7 billion, compared with $122.3 billion during the same period of 2008, the data show.

Rates indicate Fed Chairman Ben S. Bernanke and his fellow policy makers have yet to thaw private debt markets after cutting the benchmark interest rate to a range of zero to 0.25 percent and pumping money into the financial system.

Average 30-year fixed mortgage rates climbed to 5.25 percent in the seven days ended Feb. 5, from 4.96 percent three weeks earlier, according to loan finance company Freddie Mac. Rates are about 2.25 percentage points higher than 10-year Treasury yields, compared with 1.55 percentage points five years ago.

The London interbank offered rate, or Libor, for three- month dollar loans, stayed at a four-week high of 1.24 percent yesterday. It was as high as 4.82 percent in October in the aftermath of Lehman Brothers Holdings Inc.’s September collapse.

Custodial Holdings

The Fed’s custodial holdings of Treasuries for foreign entities including central banks fell for the first time in almost six months of weekly gains, declining by 0.14 percent to $1.735 trillion for the week ended Feb. 4. Foreign Treasury holdings increased 23 percent in the 24 consecutive weeks beginning Aug. 20.

Custodial holdings of agency securities rose for a second week, by 1.1 percent to $820 billion. They had declined 17 percent in the prior 16 weeks to $806.2 billion.

U.S. retail sales likely fell 0.8 percent in January, their seventh straight monthly decline, according to the median forecast in a survey of 55 economists by Bloomberg News. The government is scheduled to release the latest numbers on Feb. 12.

To contact the reporter on this story: Susanne Walker in New York at swalker33@bloomberg.net.

Last Updated: February 7, 2009 08:00 EST