Nov. 4 (Bloomberg) -- Treasuries declined on speculation the Federal Reserve will signal the economy is improving while maintaining its commitment to keep interest rates low for an extended period after its meeting concludes today.

The losses pushed the 10-year note yield to its highest level relative to 2-year yields since July as investors sought higher returns as compensation against the risk of inflation. The Treasury announced plans to sell a record $81 billion in its quarterly auctions of long-term debt next week.

“People want to see what the Fed says and how quickly they are going to start to reverse things,” said Andrew Brenner, managing director at Guggenheim Capital Markets LLC, a New-York based brokerage for institutional investors. “What you do next is dependent on if they stay with an ‘extended’ time, or if they change it in the slightest way.”

The benchmark 10-year note yield climbed three basis points to 3.50 percent at 1:03 p.m. in New York, according to BGCantor Market Data. The 3.625 percent security fell 9/32, or $2.81 per $1,000 face amount, to 101.

The difference between 2- and 10-year Treasury yields, the so-called yield curve, touched 2.57 percentage points, the most since July 28.

The difference in yield between short-and long-dated Treasuries will increase should the Fed signal it isn’t ready to raise interest rates any time soon, according to Societe Generale SA.

‘Get Clobbered’

“It is premature for the Federal Open Market Committee to send out a hawkish signal,” a team led by Vincent Chaigneau, head of currency and fixed-income strategy in London, wrote in a report today. “We expect a soft stance from the Fed today to bring some near-term relief on risk assets. This would support steepening in Treasuries.”

The FOMC will release its monetary policy statement around 2:15 p.m. in Washington. Futures on the Chicago Board of Trade show a 70 percent likelihood that the central bank will increase the target rate from the current range of between zero and 0.25 percent in June.

The FOMC “is unlikely to change its language,” Fred Goodwin, London-based executive director of rates at Nomura International Plc, wrote in a note to clients today. “Boy, if it were to happen, the front end would get clobbered.”

The Treasury said it will auction $40 billion in three-year notes on Nov. 9, $25 billion in 10-year notes Nov. 10 and $16 billion in 30-year bonds Nov. 12. The amounts were in line with the median forecast of $80 billion in a Bloomberg News survey of nine analysts.

Outlook ‘Upgraded’

The department said issuance of its Treasury Inflation- Protected Securities will rise “gradually” and that it is considering more frequent TIPS auctions to improve liquidity in this market. The department announced it would sell the 30-year TIPS bond in February, with a reopening in August, in a change from its previous TIPS bond auction schedule.

Companies in the U.S. cut payrolls an estimated 203,000 jobs in October, according to a report 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 loss of jobs is decreasing,” said John Spinello, chief technical strategist in New York at primary dealer Jefferies Group Inc. “You will get continued negative numbers. The job market is always a lagging indicator to economic growth.”

Inflation Outlook

The U.S. economy shed 175,000 jobs in October, according to the median forecast of economists surveyed by Bloomberg before a Labor Department report on Nov. 6.

Stocks climbed as Hartford Financial Services Group Inc. lifted its profit forecast. Alcoa Inc., the largest U.S. aluminum maker, and U.S. Steel Corp. climbed as a weakening dollar helped boost metal prices. The Standard & Poor’s 500 Index gained 0.9 percent.

Improving company results are fueling speculation the world economy is recovering after the crisis that cost financial companies $1.6 trillion in writedowns and credit losses, prompting major central banks to cut interest rates to record lows and buy bonds to further depress borrowing costs.

The difference between rates on 10-year notes and Treasury Inflation Protected Securities, which reflects the outlook among traders for consumer prices, rose four basis points to 2.10 percentage points. It touched 2.13 points on June 10, the highest level this year.

Public Debt

President Barack Obama has boosted the public debt to a record $7.01 trillion as he borrows unprecedented amounts to fund economic-stimulus plans. The figure is equivalent to almost half of the $14.2 trillion economy, according to data compiled by Bloomberg.

White House budget director Peter Orszag said yesterday the 2010 federal deficit will be little changed from the record $1.42 billion this year and pledged to reduce the amount of red ink without endangering the economy.

U.S. government securities have lost 2.8 percent in 2009, headed for the first annual drop in a decade, according to Merrill Lynch’s U.S. Treasury Master index. German bonds returned 1.8 percent, the indexes show.

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

Last Updated: November 4, 2009 13:05 EST