March 27 (Bloomberg) -- Treasuries, little changed today, headed for their steepest weekly loss since February before a government report economists say will show consumer spending increased for a second month.

Government notes were poised for the worst start to the year since 1996 as traders increased bets inflation will quicken and President Barack Obama raised bond sales to records, trying to snap the recession. U.S. securities slid 2.2 percent this quarter, according to Merrill Lynch & Co.’s U.S. Treasury Master index, even as the Federal Reserve began buying government debt to trim borrowing costs.

“We could see a temporary recovery in the economy,” said Hideo Shimomura, who oversees $4 billion in non-yen bonds as chief fund investor in Tokyo at Mitsubishi UFJ Asset Management Co., a unit of Japan’s largest bank. “Inflation expectations are high because of the huge policy actions.” Shimomura said he is trimming his Treasury holdings.

The 10-year yield increased one basis point to 2.75 percent as of 1:41 p.m. in Tokyo, according to BGCantor Market Data. The price of the 2.75 percent security due in February 2019 fell 3/32 or 94 cents per $1,000 face amount, to 99 31/32. A basis point is 0.01 percentage point.

The yield advanced 12 basis points this week. It declined to a record low of 2.04 percent on Dec. 18 and averaged 4.26 percent for the past five years.

Consumer Spending

U.S. consumer spending probably rose in February for a second month, a sign the biggest part of the economy may be steadying, analysts said before a government report today. Best Buy Co., the largest U.S. electronics retailer, yesterday reported a profit that fell less than analysts forecast.

The difference between yields on 10-year notes and Treasury Inflation Protected Securities, representing the outlook among traders for consumer price gains, climbed to a five-month high of 1.48 percentage point.

The TIPS spread is still less than the five-year average of 2.27 percentage points. U.S. consumer prices rose 0.2 percent in the 12 months ended Feb. 28, which means 10-year notes yield 2.56 percent after inflation. That so-called real yield is more than double the five-year average.

The government is auctioning record amounts of debt to revive economic growth, service deficits, and cushion the failures in the financial system. Sales will almost triple this year to a record $2.5 trillion, according to estimates from Goldman Sachs Group Inc., helping drive the worst first quarter for Treasuries in 13 years. Goldman is one of the 16 primary dealers that are required to bid at government debt auctions.

Bond Purchases

In March 1996, Treasuries suffered their biggest one-day decline since 1987 after a government report showed the economy added 705,000 jobs in one month. By contrast, the current recession has brought job cuts of more than 600,000 for three straight months.

The Fed on March 25 began its first targeted purchases of Treasuries since the early 1960s, buying $7.5 billion of the securities. The central bank is scheduled to buy notes due from March 2011 to April 2012 today, and it plans to scoop up $300 billion of notes and bonds over the next six months.

“We don’t want to fight the Fed,” said Shinji Kunibe, a Tokyo-based senior money manager at JPMorgan Asset Management Japan Ltd., which oversees $847 billion globally and is part of the third-biggest U.S. bank. “We are bullish.” Kunibe said he added to his holdings earlier this year.

Default Risk

The cost to hedge against losses on U.S. Treasuries using credit-default swaps fell to the lowest level since January.

Swaps on U.S. government debt in euros for five years declined to 56 basis points yesterday from 67.5 basis points the day before. That means it costs 56,000 euros ($76,034) to protect 10 million euros of debt. The 17 percent decline was the steepest in almost a year.

Credit-default swaps, contracts to protect against or speculate on default, pay the buyer face value if a borrower fails to adhere to its debt agreements.

Treasury one-month bill rates turned negative yesterday for the first time since December, falling to minus 0.01 percent. The rate has averaged 0.09 percent for the past six months. Because of their short maturities, bills tend to follow what the Fed does with its target for overnight lending between banks. The central bank cut the rate to a range of zero percent to 0.25 percent in December.

Yields indicate government and central bank plans to spur the economy haven’t restored credit markets to where they were before tumbling last year.

U.S. company bonds yielded 7.90 percentage points more than Treasuries, widening from 4.06 percentage points 12 months ago, Merrill’s Corporate & High Yield Master index shows.

The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, widened to 1.09 percentage point from 91 basis points on Feb. 10. The spread averaged 36 basis points in 2006 before the credit crunch started.

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

Last Updated: March 27, 2009 01:28 EDT