Treasury Yields High on Inflation Concern

The yield curve widened to a record level today demonstrating investors fear that an accelerating recovery will fuel inflation and hurt demand for unprecedented government debt sales.

Government backed securities witnessed the largest drop since August, before the U.S. tomorrow announces the sizes of two-, five- and seven-year auctions next week.  

Treasuries were unchanged today with 10-year yield near the highest level in four months, on concern the government’s final figure for third-quarter gross domestic product will add to fears inflation is poised to accelerate.

The benchmark 10-year note yielded 3.67 percent. The 3.375 percent security due November 2019 traded at 97 19/32. The two-year yield held at 0.86 percent.

The difference between 2- and 10-year Treasury note yields increased to as much as 282 basis points yesterday. 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.

The world’s largest economy expanded at a 2.8 percent annual rate, matching last month’s estimate, according to the median estimate of economists surveyed by Bloomberg before today’s Commerce Department report.

A separate report tomorrow will probably show consumer spending rose 0.7 percent in November, the same as the previous month, further adding to signs recovery is picking up.

The U.S. plans to sell two-year notes on Dec. 28, five-year notes on Dec. 29 and seven-year bonds on Dec. 30. The package will total $118 billion, according to Wrightson ICAP LLC, an economic advisory firm in Jersey City, New Jersey.

President Barack Obama is borrowing unprecedented amounts for spending programs. U.S. marketable debt increased to a record $7.17 trillion in November from $5.80 trillion at the end of last year. Treasuries of all maturities have fallen 3 percent this year through yesterday, according to Bank of America Corp. Merrill Lynch indexes.