Treasury 10-Year Yields Reach 4-Month High on Inflation Bets

Dec. 22 (Bloomberg) -- Treasuries dropped, pushing 10-year yields to the highest level in four months, on prospects the U.S. government’s final figure for third-quarter gross domestic product will signal accelerating inflation.

The yield curve, the gap between shorter- and longer-term debt used as a barometer for the economy, widened to a record as investors bet an accelerating recovery will fuel inflation and hurt demand for unprecedented government debt sales. Government securities extended yesterday’s losses, the largest drop since August, before the U.S. tomorrow announces the sizes of two-, five- and seven-year auctions next week.

“Inflation fears are being sparked by oil price gains,” said Kazuaki Oh’e, a bond salesman in Tokyo at Canadian Imperial Bank of Commerce, the nation’s fifth-largest lender. “The trend has changed from deflation to neutral and that is damaging the bond market.”

The yield on the benchmark 10-year note rose two basis points, or 0.02 percentage point, to 3.7 percent, the highest since Aug. 13, as of 10:24 a.m. Tokyo, according to BGCantor Market Data. The 3.375 percent security due November 2019 fell 6/32, or $1.88 cents per $1,000 face amount, to 97 11/32. The two-year yield was little changed at 0.87 percent.

The difference between 2- and 10-year Treasury note yields increased to 283 basis points today. It rose from 145 basis points at the beginning of the year, with the Federal Reserve anchoring its target rate at virtually zero and the U.S. extending the average maturity of its debt.

The yield curve reached its previous record of 281 basis points on June 5, when Treasuries plunged after a government report showed the smallest decline in U.S. payrolls in eight months. Ten-year note yields touched 4 percent the following week, the highest level in 2009.