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Treasuries Head for Fourth Weekly Decline Before Spending Data

Dec. 23 (Bloomberg) -- Treasuries headed for a fourth weekly decline, the longest losing streak in 19 months, before a government report economists said will show consumer spending gained last month.

The Federal Reserve may need to slow or stop its purchases of Treasuries in response to an accelerating U.S. economy next year, Philadelphia Fed President Charles Plosser said. Yields indicate traders are adding to bets inflation will quicken as the economy improves.

“It’s hard for bond yields to fall,” said Geoff Howie, a senior vice president at MF Global Singapore Ltd., part of the world’s largest broker of exchange-traded futures and options. “You’re seeing consumer spending pick up, and you’re going to see producers start passing on costs. You’re going to have an inflation effect.”

Benchmark 10-year yields were little changed at 3.35 percent as of 6:47 a.m. in London, according to BGCantor Market Data. The price of the 2.625 percent security maturing in November 2020 was 93 30/32.

Yields have climbed almost half a percentage point in the past four weeks, the longest run of increases since May 2009, when rates completed a seven-week climb on concern government borrowing would overwhelm demand.

Spending by U.S. consumers, which accounts for about 70 percent of the economy, rose 0.5 percent after a 0.4 percent gain in October, according to the median estimate of economists surveyed by Bloomberg News before the data today. Bed Bath & Beyond Inc., the Union, New Jersey-based home- products retailer, yesterday increased its earnings forecast.

A separate report may show bookings for durable goods excluding cars and planes advanced 1.8 percent.

Fed Reaction

The difference between rates on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the securities, widened to 2.31 percentage points from this year’s low of 1.47 percentage points in August. It’s above the five-year average of 2.09 percentage points.

“If the growth rate of the economy continues to strengthen and looks sustainable, then I am going to be looking for the Fed to react to that,” Plosser said yesterday in an interview on Bloomberg Radio’s “The Hays Advantage,” with Kathleen Hays. “That may be to cut back on the degree of accommodation in a gradual way. One way would be to begin stopping some of the purchases or slowing them down.”

The Fed plans to add $600 billion to the economy by buying Treasury securities, while President Barack Obama agreed to extend tax cuts to spur growth.

Auction Plans

The Treasury is scheduled to announce today the sizes of two-, five- and seven-year auctions scheduled for next week.

It will probably sell $99 billion of notes, according to a Bloomberg News survey of 13 primary dealers, unchanged from November’s auctions of the securities.

The pound rose after Bank of England Markets Director Paul Fisher said in a Daily Telegraph interview that the central bank is seeking higher interest rates. The British currency advanced 0.2 percent to $1.5422.

December’s advance in U.S. yields reflects expectations for economic growth, said Peter Jolly, the Sydney-based head of market research for the investment-banking unit of National Australia Bank Ltd., the nation’s largest lender. Inflation has been held in check, and that will support bonds, he said.

‘Little Inflation’

“The U.S. economy, although it is recovering, has very little inflation,” Jolly said. “Yields have risen quite a long way. There’s a fair bit of the recovery story in yields.”

Today’s spending report will also show the Fed’s preferred price measure, which excludes food and fuel, rose 0.9 percent from a year earlier, economists said. The figure would match October’s, which was the smallest since records began in 1960.

Ten-year rates will decline to 3.3 percent by March 31 and then advance to 4 percent by the end of 2011, Jolly said.

A Bloomberg survey of banks and securities companies projects the yield will rise to 3.53 by the close of next year, with the most recent forecasts given the heaviest weightings. Investors who bought today would earn 2 percent, reflecting both price declines and interest payments, according to data compiled by Bloomberg.

Client Withdrawals

Bond mutual funds had the biggest client withdrawals in more than two years last week.

U.S. bond funds experienced withdrawals of $8.62 billion in the seven days ended Dec. 15, up from $1.66 billion the week before, according to the Investment Company Institute, a Washington-based trade group.

Financial markets are closed today in Japan for a holiday. Trading of Treasuries is scheduled to stop at 2 p.m. in New York and stay shut tomorrow worldwide for Christmas, according to the Securities Industry and Financial Markets Association website.

U.K. trading will remain closed Dec. 27 and Dec. 28 in observance of Christmas and Boxing Day, according to the association.

Treasuries handed investors a 2.1 percent loss this month, according to Bank of America Merrill Lynch indexes. The last time U.S. sovereign debt fell more in a month was in December 2009, when it dropped 2.6 percent.

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

To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net.

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