Treasury Update

Treasury two-year notes fell by the most in two weeks as a tumble in commodities boosted stocks and sapped demand for the relative safety of government debt.
Ten-year notes yielded the least relative to two-year securities in four days. The narrowing of the yield gap indicates investors are favoring longer-dated debt, which is more sensitive to inflation. Traders' expectations for inflation over the next decade fell to the least in almost five years as oil dropped to the lowest since May, yields on Treasuries whose payments are tied to the consumer price index showed.

Stock strength is definitely causing the short-end weakness,'' said Salvatori Anello, director of Treasury futures in New York at Barclays Capital Inc., one of 19 primary dealers that trade government securities with the Federal Reserve. ``Decreasing inflation concerns are helping keep the longer end bid.''

The yield on the two-year note climbed 7 basis points, or 0.07 percentage point, the most since July 25, to 2.5 percent as of 4:34 p.m. in New York, according to BGCantor Market Data. On the week, the yield was little changed. The 2.75 percent security due in July 2010 fell 1/8, or $1.25 per $1,000 face amount, to 100 15/32.

Futures Broker Jason Blaylock indicates "a Fed Cut in the near future could throw the market in a backword spiral"