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Treasuries Drop Before This Week’s Debt Sales, Retail-Sales Data

Feb. 11 (Bloomberg) -- Treasury 10-year notes declined for the first time in four days as the U.S. government prepared to auction $72 billion in coupon-bearing securities this week.

Longer maturities led losses as economists said a report in two days will show retail sales rose in January amid an improving labor market. The government is scheduled to sell $32 billion of three-year notes tomorrow, $24 billion in 10-year debt the following day and $16 billion in 30-year bonds on Feb. 14. President Barack Obama intends to use his State of the Union address this week to focus on job creation, marking a renewed emphasis on the economic issues.

“We’re in a tight range and the auctions this week will be the focus for Treasuries,” said Barra Sheridan, a rates trader at Bank of Montreal in London. “The market can cheapen up into those sales and the 10-year should auction above 2 percent.”

The 10-year yield rose three basis points, or 0.03 percentage point, to 1.98 percent as of 7:34 a.m. in New York, according to Bloomberg Bond Trader prices. The 1.625 percent note due in November 2022 declined 7/32, or $2.19 per $1,000 face amount, to 96 7/8. The yield declined seven basis points last week.

Treasuries handed investors a 0.8 percent loss this year through Feb. 8, compared with a 0.5 percent decline for an index of government bonds around the world, according to Bank of America Merrill Lynch data. The benchmark 10-year yield climbed to 2.06 percent on Feb. 4, the highest level since April 12.

‘Cleaning Up’

The U.S. last sold 10-year notes on Jan. 9 at a yield of 1.863 percent. Investors submitted orders for 2.83 times the amount on offer, down from 2.95 times in December

“The refunding auctions are going to determine the tone of trading for the week,” analysts led by Ward McCarthy, chief financial economist at Jefferies & Co., wrote in a note to clients dated Feb. 8. “The notes are hovering around 2 percent and probably need to back up six or seven basis points before investors feel comfortable coming in and cleaning up at the auction.”

Retail sales climbed 0.1 percent in January, after gaining 0.5 percent in December, according to the median estimate in a Bloomberg News survey of 68 economists before the Commerce Department report’s the figure on Feb. 13.

Hedge-fund managers and other large speculators boosted their net-long position in 10-year note futures in the week ending Feb. 5, according to U.S. Commodity Futures Trading Commission data. Speculative long positions, or bets prices will rise, increased 10 percent to 46,906 contracts on the Chicago Board of Trade.

Traders raised bets on declines in 30-year bond futures by 37 percent to the most since March, while trimming net long positions 24 percent on five-year note futures, the data show.

Obama Address

Obama previewed his Feb. 12 State of the Union address in remarks before House Democrats meeting in Virginia last week, where he advocated “an economy that works for everybody.”

“I’m going to be talking about making sure that we’re focused on job creation here in the United States of America,” the President said.

Federal Reserve Chairman Ben S. Bernanke says the end of the central bank’s bond buying won’t constitute a move toward tighter policy. He may have a tough time convincing stock and bond investors that’s true.

The Fed is acquiring $85 billion of securities each month, and policy makers are grappling with how to condition markets not to interpret a stop in those purchases as a prelude to the exit from easy credit. Bernanke said on Dec. 12 in Washington that he “would emphasize” that the end won’t be “a turn to tighter policy.”

Convince Investors

If the Fed fails to convince investors, interest rates may climb prematurely, as traders arrange positions for the withdrawal of unprecedented monetary stimulus, according to Dean Maki, chief U.S. economist at Barclays Plc in New York. The Fed has kept its benchmark federal funds rate near zero for more than four years and swelled its balance sheet to a record of more than $3 trillion through three asset-purchase programs.

“There is a risk the markets get ahead of the Fed,” said Maki, a former Fed board economist. “It will be tricky for the Fed to signal it’s going to stop buying without signaling that tightening is imminent.”

Ending the Fed’s third round of so-called quantitative easing carries greater significance than completion of the previous two because those were introduced with defined amounts and durations.

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