Nov. 4 (Bloomberg) -- Treasuries fell for a third day after Federal Reserve officials said they’re more optimistic about the economic outlook and the U.S. announced plans to sell $81 billion in notes and bonds next week.

Yields on 10-year notes rose even as central bankers repeated their pledge to leave the target rate for overnight loans between banks in a range of zero to 0.25 percent for an “extended period.” The gap in yields between two- and 10-year notes widened to 264 basis points, the most since July 27.

“The longer the Fed doesn’t change anything in terms of their assessment, it pushes rate hikes out into the future,” said Christopher Bury, co-head of fixed-income rates at Jefferies & Co., one of the 18 primary dealers that trade with the central bank. “To the extent the market is worried that they’d be behind the curve and late to tighten, that would be inflationary.”

The 10-year note yield rose five basis points, or 0.05 percentage point, to 3.52 percent at 4:33 p.m. in New York, according to BGCantor Market Data. Thirty-year bond yields climbed seven basis points to 4.40 percent.

Yields on the two-year note, most sensitive to interest- rate changes, fell two basis points to 0.90 percent.

“It’s on the dovish side,” said Alex Li, an interest-rate strategist in New York at Credit Suisse AG, another primary dealers. “It raises investors’ concern for the long rates. They are going to stay low and long-term inflation expectations may be going up.”

Inflation Expectations

Discussing inflation, the central bank said: “With substantial resource slack likely to continue to dampen cost pressures and with longer term inflation expectations stable, the Committee expects that inflation will remain subdued for some time.”

The Fed completed its $300 billion program of purchasing Treasuries last month. Today’s statement said the central bank will purchase a total of $1.25 trillion of agency mortgage- backed securities and “about $175 billion of agency debt” through the first quarter of next year.

“The amount of agency debt purchases, while somewhat less than the previously announced maximum of $200 billion is consistent with the recent path of purchases and reflects the limited availability of agency debt,” the statement said.

Record-low interest rates and Fed purchases of Treasuries and mortgage debt, combined with the Obama administration’s $787 billion fiscal stimulus, helped boost gross domestic product 3.5 percent from July to September. Without the auto industry, which benefited from the government’s “cash for clunkers” program, growth would have been 1.9 percent.

Breakeven Rate

The difference between rates on 10-year notes and Treasury Inflation Protected Securities widened 0.06 percentage point to 2.12 percentage point, the most since Sept. 1, 2008, indicating concern about rising consumer prices are the highest since before the collapse of Lehman Brothers Holdings Inc.

“It signals there’s a disconnect between what the Fed is seeing and what the market perceives things to be,” said Sean Simko, who oversees $8 billion at SEI Investments Co. in Oaks, Pennsylvania.

Treasuries lost 2.8 percent this year, according to Merrill Lynch & Co.’s U.S. Treasury Master Index, amid concern the economy shows signs of emerging from the longest recession in at least 50 years and debt sales climbed.

Borrowing Cap

The government said today it will sell $40 billion of three-year notes, $25 billion of 10-year debt and $16 billion of 30-year bonds next week. The amounts are all records, according to data compiled by Bloomberg. It will also reintroduce 30-year TIPS and stop issuance of the 20-year inflation-lined security.

The U.S. is headed for a second straight year of budget deficits exceeding $1 trillion. That means another year of government debt sales of $1.5 trillion to $2 trillion, Treasury debt-management director Karthik Ramanathan said in minutes released today of a Nov. 3 meeting with bond market participants.

The Treasury also said it expects to run up against the debt ceiling, which currently stands at $12.1 trillion, by mid- to late-December. The Treasury said it would keep Congress and investors apprised of debt-limit developments because “the government’s cash flows are volatile” and forecasting a precise date is difficult.

Employment Report

President Barack Obama said Oct. 29 in a speech at the White House that U.S. economic growth in the third quarter affirms that the recession is abating. A Labor Department report on Nov. 6 may show the jobless rate rose to 9.9 percent in October, even as the economy returned to growth.

Companies in the U.S. cut payrolls an estimated 203,000 jobs in October, according to a report today from ADP Employer Services, compared with a revised 227,000 drop the prior month. The figures were forecast to show a decline of 198,000 jobs, according to the median estimate of a Bloomberg survey.

The Federal Open Market Committee was expected to leave its benchmark rate unchanged, according to all 95 economists in a Bloomberg survey. The Fed has held its target rate for overnight loans between banks at zero to 0.25 percent since Dec. 16.

To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net; To contact the reporters on this story: Daniel Kruger in New York at dkkruger1@bloomberg.net

Last Updated: November 4, 2009 16:36 EST