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March 28, 2011 (Bloomberg) — Treasuries fell, pushing 10-year yields to the highest in more than two weeks, on speculation the Federal Reserve may end its debt-purchase program early as the world’s biggest economy shows signs of a sustained recovery.

Five-year U.S. notes fell for an eighth day, the longest streak since before the collapse of Lehman Brothers Holdings Inc. St. Louis Federal Reserve Bank President James Bullard said on March 26 policy makers should review whether to complete $600 billion of Treasury purchases, a policy known as quantitative easing. Reports this week will show consumer spending rose in February, while the economy added more jobs last month, according to surveys of economists by Bloomberg.

“The market is concerned about how soon QE2 will be terminated, or whether they will even stop short of implementing the full package,” said Philip Marey, a senior market economist at Rabobank Groep in Utrecht, Netherlands. “It’s going to be difficult for yields to go much lower when the longer-term perspective is that the U.S. economy is recovering, inflation is rising and there’s talk of an early exit for QE2.”

Benchmark 10-year yields rose four basis points to 3.48 percent as of 11 a.m. in London, according to Bloomberg Bond Trader data. The 3.625 percent note maturing in February 2021 fell 10/32, or $3.13 per $1,000 face amount, to 101 6/32. The note yielded as much as 3.48 percent, the most since March 9. The five-year yield was at a 2 1/2-week high of 2.22 percent.

No Deviation

The decline in five-year is the longest streak since April 2008, as investors awaited a $35 billion sale of two-year debt today in the first of three auctions this week. The 2.125 percent note due February 2016 fell 8/32, or $2.50, to 99 18/32.

Fed Chairman Ben S. Bernanke has given no indication that the central bank will deviate from its plan to buy bonds through June to spur economic growth and reduce the 8.9 percent unemployment rate. Bullard, who in July became the first policy maker to call for Fed purchases of Treasuries, has said the Federal Open Market Committee should review the plan at every meeting and, if necessary, continue it indefinitely.

“The economy is looking pretty good,” Bullard told reporters in Marseille, France. “It is still reasonable to review QE2 in the coming meetings, especially this April meeting, and see if we want to decide to finish the program or to stop a little bit short.”

The Fed is scheduled to purchase between $5.5 billion and $7.5 billion of government debt today.

Yield Forecast

Treasuries have handed investors a 0.1 percent loss this quarter even after accounting for reinvested interest, based on Bank of America Merrill Lynch data.

The Thomson Reuters/Jefferies CRB Index of 19 commodities gained 8 percent so far this year, while the MSCI All Country World Index of stocks returned 2.8 percent, including reinvested dividends.

The 10-year yield will advance to 3.91 percent by year-end, according to a Bloomberg survey of banks and securities companies with the most recent forecasts given the heaviest weightings.

The two-year notes being sold today yielded 0.78 percent in pre-auction trading, compared with 0.745 percent at the prior sale on Feb. 22. Indirect bidders, the category of investors that includes foreign central banks, bought 31.3 percent of the notes last month. Direct bidders, non-primary dealers buying for their own accounts, purchased 6.8 percent, the least since November 2009.

Spending Data

The Treasury is scheduled to follow today’s two-year sale with a $35 billion five-year auction tomorrow and a $29 billion seven-year offering on March 30.

Consumer spending, which accounts for about 70 percent of the U.S. economy, rose 0.5 percent in February after a 0.2 percent gain the prior month, according to the median forecast in a Bloomberg News survey. Personal income rose 0.4 percent, a separate survey showed.

Payrolls climbed by 195,000 this month, the most since May, after a 192,000 gain in February, the surveys show.

The worldwide recovery is continuing, especially in Asia and the U.S., and remains vulnerable, Federal Reserve Bank of St. Louis President James Bullard said March 26.

The first coordinated intervention in foreign-exchange markets by the Group of Seven nations in more than a decade will combine with rising oil prices to support Treasuries, some investors said.

‘Death Spike’

Oil at more than $100 a barrel may temper economic growth at the same time developed nations from Germany to Japan sell yen and buy U.S. debt with the proceeds. Every $10 per barrel increase in crude cuts U.S. growth as much as 0.3 percentage point, UBS AG estimates. Japan will need to reinvest the estimated $25 billion acquired as it drove the yen lower on March 18 after the nation’s worst earthquake on record.

“I don’t think the Treasury market has had the death spike put into it,” said Mark MacQueen, a partner at Austin, Texas- based Sage Advisory Services Ltd., which oversees $9.5 billion. “The market’s extremely sensitive to perceptions of future economic growth. Any time that comes into question, the Treasury market’s the place to be.”

Warren Buffett, the billionaire investor, said investors should avoid long-term fixed-income bets in U.S. dollars because the currency’s purchasing power will decline.

“I would recommend against buying long-term fixed-dollar investments,” Buffett, chairman and chief executive officer of Berkshire Hathaway Inc., said March 25 in New Delhi. “If you ask me if the U.S. dollar is going to hold its purchasing power fully at the level of 2011, 5 years, 10 years or 20 years from now, I would tell you it will not.”

An index of investor sentiment toward Treasuries fell last week, based on a survey by Ried Thunberg ICAP Inc. The end-of- June gauge slipped to 46 from 47 for the week ended March 25, according to a survey of 19 money managers. A figure less than 50 indicates investors expect prices to decline.

–With assistance from Susanne Walker, Daniel Kruger and Andrew Frye in New York, Pooja Thakur in Mumbai and Unni Krishnan in New Delhi, Scott Hamilton in London. Editors: Keith Campbell, Daniel Tilles.

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