Treasuries Fall Before Fed, Pushing 30-Year Bond Yield to Seven-Month High

Treasuries dropped, pushing the 30- year bond yield to a seven-month high, as reports before the Federal Reserve’s statement showed retail sales increased more than forecast and producer prices accelerated.

U.S. debt also fell on bets President Barack Obama’s plan to extend tax cuts will win passage in Congress, supporting the economic recovery. Policy makers led by Fed Chairman Ben S. Bernanke meeting today in Washington may reiterate support for government debt purchases known as quantitative easing.

“The data we’ve seen have been positive for the economy and certainly lessens the worries of a deflationary environment,” said Jason Rogan, director of U.S. government trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors. “That has helped to bring about selling in the market. We’re not anticipating any change in policy. Bernanke may talk further about the need for QE2. People will try to see if there’s a willingness to buy more.”

The 10-year note yield increased 11 basis points, or 0.11 percentage point, to 3.38 percent at 12:50 p.m. in New York, according to BGCantor Market Data. The price of the 2.625 percent security maturing in November 2020 fell 27/32, or $8.44 per $1,000 face amount, to 93 21/32.

A drop of more than one point in 30-year bonds pushed the yield up 12 basis points to 4.53 percent, the highest level since May 4. The two-year note yield advanced three basis points to 0.61 percent.

Ten-Year Yield

The yield on the 10-year note touched 3.39 percent, the highest level since June 3. The yield will rise to 3.55 percent by the end of 2011, according to the average forecast in a weighted Bloomberg survey of economists.

“In the medium to long term, the trend is up in terms of yields,” said Marc Ostwald, a fixed-income strategist at Monument Securities Ltd. in London.

The Fed, holding its final policy meeting of 2010 today, announced on Nov. 3 an additional $600 billion of Treasury purchases through June under the policy known as quantitative easing to support the economic recovery.

Buying more government bonds is “certainly possible,” Fed Chairman Ben S. Bernanke said in an interview broadcast on CBS Corp.’s “60 Minutes” on Dec. 5. “It depends on the efficacy of the program” and the outlook for inflation and the economy, Bernanke said.

“The market probably expects that Bernanke will very much be jawboning and talking up QE2 as a responsible policy,” said Damien McColough, head of fixed-income research in Sydney at Westpac Banking Corp., Australia’s second-largest lender. “I’m not hugely bearish from here” on Treasuries.

Fed Debt Buying

Primary dealers, firms that trade directly with the Fed, submitted yesterday $18.268 billion of debt due from June 2016 to November 2017 for possible purchase by the central bank, compared with $33.126 billion in the same maturity range on Dec. 9. The Fed bought $7.79 billion of debt yesterday, part of $105 billion in purchases over the next month.

The Senate advanced yesterday Obama’s $858 billion agreement with Republicans to extend all Bush-era income-tax cuts, and Senate passage may come today. The 83-15 vote had widespread support from members of both political parties.

Obama’s deal, announced Dec. 6, includes a two-year extension of tax rates in return for extending long-term jobless benefits for 13 months and cutting the payroll tax by $120 billion for a year.

The extension of tax cuts is likely to boost economic growth in the next two years but will “adversely affect” the budget deficit, Moody’s Senior Credit Officer Steven Hess in New York wrote in a note yesterday.

‘Credit-Negative’

“Unless there are offsetting measures, the package will be credit-negative for the U.S. and increase the likelihood of a negative outlook on the U.S. government’s Aaa rating during the next two years,” Hess wrote.

Retail sales gained 0.8 percent last month as Americans started their holiday shopping, the Commerce Department reported today. The median forecast of 77 economists in a Bloomberg News survey was for an increase of 0.6 percent.

Wholesale costs in the U.S. rose in November by the most in eight months, led by higher prices for gasoline, heating oil and fruit. The producer price index increased 0.8 percent from the prior month after a 0.4 percent advance, the Labor Department said. Excluding more volatile food and energy costs, the core measure posted the smallest year-over-year gain in five months.

To contact the reporters on this story: Cordell Eddings in New York at ceddings@bloomberg.net; Susanne Walker in New York at swalker33@bloomberg.net

To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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