Jan. 24 (Bloomberg) -- Treasuries fell, with 30-year bonds losing the most this week in 22 years, as the U.S. readied $78 billion in debt sales over the next five days to finance fiscal stimulus spending projected to swell the deficit to $1 trillion.

Yields rose as Federal Reserve policy makers prepared to meet on Jan. 28 to decide the next monetary step aimed at lifting the economy from recession. A government report due next week is expected to show the economy contracted last quarter for the second straight three-month period.

“Supply is probably the biggest story,” said Carl Lantz, an interest-rate strategist in New York at Credit Suisse Securities USA LLC, one of 17 primary dealers that trade with the Fed. “From here until we get the 30-year bond auction in the second week of February, there is a lot to get done.”

Thirty-year yields climbed 43 basis points on the week to 3.32 percent in New York, according to BGCantor Market Data. The gain was the most since bond yields increased 49 basis points in the five days ended April 24, 1987. The price of the 4.5 percent security maturing in May 2038 tumbled 9 25/32, or $97.81 per $1,000 face amount, to 122. The two-year note yield was up seven basis points on the week to 0.80 percent.

The benchmark 10-year note yield, used to set corporate borrowing costs and mortgage rates, rose 30 basis points, the most since increasing 35 basis points in the week ended June 13, 2008, to 2.62 percent.

5.5 Percent Contraction

Longer-term Treasuries sold off amid concern President Barack Obama will have to boost debt sales to help cushion an economy that contracted by 5.5 percent in the fourth quarter, according to the median estimate of 66 economists surveyed by Bloomberg News. The Commerce Department will release the report on gross domestic product on Jan. 30.

Obama pressed congressional leaders yesterday to reach a consensus on an economic stimulus plan expected to cost $825 billion, warning the U.S. may be facing an “unprecedented” economic crisis. The president said the legislation is “on target” for passage by mid-February.

Goldman Sachs Group Inc. on Jan. 22 raised its 2009 Treasury borrowing estimate to $2.5 trillion. The firm estimated the deficit this year at $1.4 trillion.

The Treasury will auction $8 billion in 20-year Treasury Inflation Protected Securities, or TIPS, on Jan. 26; $40 billion in two-year notes on Jan. 27; and $30 billion in five-year notes on Jan. 29.

‘Most Challenging Thing’

The government will likely sell $66 billion in three-, 10-, and 30-year securities next month in the Treasury’s quarterly refunding, equal to an estimated $62.5 billion in 10-year duration equivalents, according to David Ader, head of U.S. interest-rate strategy at Greenwich, Connecticut-based RBS Greenwich Capital Markets, another primary dealer.

“We’re facing the largest sale of 10-year equivalents ever with the refundings ahead,” Ader said. “Supply is going to be the most challenging thing we’ll have to deal with.”

Concern that supply will burgeon caused shorter-term securities to outperform longer-term notes and bonds this week. The difference between the yields on two- and 10-year notes grew by 21 basis points to 1.81 percentage points, the widest it has been since the week ended Dec. 12. The broadening came even as investors expected the gap to narrow with the prospect of the Fed buying longer-term U.S. debt, which policy makers have said they may do if long-term yields rise too much.

Selling ‘Overdone’

While this week’s sell-off was attributed to the large amount of supply expected, the rise in yields was “overdone,” according to Michael Pond, interest rate strategist at primary dealer Barclays Capital Inc. in New York.

“We are approaching the refunding period where we will get long-dated issuance, so its not surprising that it is weighing on investors’ minds,” Pond said. “Regardless, the economy remains weak and we do expect rates to remain low.”

Ten-year rates will fall to 2.42 percent by March 31, according to the median forecast of 62 economists in a Bloomberg survey. The 30-year yield will fall to 2.98 percent by the end of March, according to economists’ forecasts.

Yields also rose this week after Timothy Geithner, Obama’s pick for Treasury secretary, charged China is “manipulating” its currency, fueling concern foreign demand for U.S. debt may ease. A Chinese commerce ministry spokesman who couldn’t be identified under ministry rules responded yesterday, saying the country hasn’t manipulated the currency’s value.

Inflation Expectations

Thirty-year bonds have lost 9.3 percent this year as investors bet the government’s efforts to spur the economy by borrowing will ultimately lead to inflation, according to Merrill Lynch & Co.’s indexes.

“Historically, when we have seen supply and demand concerns arise it generally hits the long end more,” said Suvrat Prakash, an interest-rate strategist in New York at BNP Paribas Securities Corp., another primary dealer. “It is concern about the long term and how will the Treasury be able to keep rates low with so much issuance, but there are also arguments that it feeds inflation.”

The difference between rates on 10-year notes and TIPS, which reflects the outlook among traders for consumer prices, widened to a nine-week high of 73 basis points.

The so-called real yield, or what investors get from 10- year notes after inflation, reached a 16-month high of 2.55 percent. Consumer prices rose 0.1 percent for all of 2008, after increasing 4.1 percent the previous year, Labor Department figures showed.

To contact the reporter on this story: Dakin Campbell in New York at dcampbell27@bloomberg.net

Last Updated: January 24, 2009 08:00 EST