Nov. 4 (Bloomberg) -- Treasuries were little changed before U.S. reports forecast to show service industries expanded and companies cut the fewest jobs in more than a year in October, underpinning optimism the world’s largest economy is recovering.

Ten-year notes completed a back-to-back decline yesterday on speculation the Federal Reserve will highlight the strengthening economy and soften its pledge to keep interest rates at record lows for an extended period. All economists surveyed by Bloomberg expect the central bank to maintain borrowing costs in the range of zero to 0.25 percent at today’s policy meeting. The Treasury is scheduled to announce today how much it plans to raise in note and bond sales next week.

“The Fed will change their tone regarding the time frame of lower rates, which is negative for short-term yields,” said Yasutoshi Nagai, chief economist at Daiwa Securities SMBC Co. in Tokyo. “They can’t change it too much because although manufacturing is looking good, employment is not so good.”

The benchmark 10-year note yield climbed less than 1 basis point to 3.48 percent as of 8:12 a.m. in London, according to BGCantor Market Data. The 3.625 percent security fell 2/32, or 63 cents per $1,000 face amount, to 101 7/32. Yields rose 7 basis points over the past two days. Two-year notes yielded 0.92 percent, or 0.67 percentage point above the upper range of the Fed’s target rate.

The Institute for Supply Management’s index of non- manufacturing businesses rose to 51.5 last month, the highest level since April 2008, according to the median forecast of economists surveyed by Bloomberg News.

A separate report is estimated by economists to show companies continued to cut jobs. Payrolls shrank by 198,000 jobs last month, according to the median estimate of economists surveyed before the report from ADP Employer Services.

Fed Policy Meeting

The Federal Open Market Committee will release its monetary policy statement today in Washington.

“There is some speculation that the Fed will soften their reference to extended period,” said Adam Carr, a senior economist at ICAP Australia Ltd. in Sydney. “There is clearly a very vigorous debate occurring at the Fed.”

Futures on the Chicago Board of Trade show a 70 percent likelihood that the central bank will increase the target rate from the current range of between zero and 0.25 percent by June.

Treasury bulls say yields are likely to decline as signs of deflation boost the attraction of debt.

Reports last month showed consumer spending fell 0.5 percent in September, and the consumer price index dropped 1.3 percent from a year earlier. That means real yields, or what investors get after accounting for the cost of living, were at 4.77 percent.

‘Pressure Is Mounting’

Spending is falling and “the employment condition is still deteriorating, so deflation pressure is mounting,” said Akira Takei, a manager in the international bond investment department in Tokyo at Mizuho Asset Management Co., a unit of Japan’s second-largest bank. “I maintain my bullish views on Treasuries.” Deflation is a general drop in prices.

Ten-year yields are likely to decline to 2.75 percent by the end of this year, Takei said. Investors who buy the debt today sell at year-end would make a 6 percent return should his forecast prove accurate, Bloomberg calculations show.

The difference between rates on 10-year notes and Treasury Inflation Protected Securities, which reflects the outlook among traders for consumer prices, was little changed at 2.06 percentage points. It increased to 2.13 points on June 10, the highest level this year, from 0.01 point on Dec. 31.

The government will sell $40 billion of three-year notes, $24 billion of 10-year debt and $16 billion of 30- year bonds next week, according to Wrightson ICAP LLC, a Jersey City-based research firm that specializes in government finance.

The Treasury said last month it plans to increase the average maturity of its outstanding debt from a 26-year low of 49 months reached December 2008 to between 72 and 84 months.

Swelling Debt

U.S. President Barack Obama has boosted the public debt to a record $7.01 trillion as he borrows unprecedented amounts to fund economic-stimulus plans. The figure is equivalent to almost half of the $14.2 trillion economy, according to data compiled by Bloomberg.

White House budget director Peter Orszag said the 2010 federal deficit will be little changed from the record $1.42 billion this year and pledged to reduce the amount of red ink without endangering the economy.

“Deficits of this size are serious and ultimately unsustainable,” Orszag said in prepared remarks at New York University. He said next year’s revenue shortfall is projected to “be about the same size,” with $9 trillion in deficits over 10 years, averaging about 5 percent of the economy.

U.S. government securities are headed for a loss of 2.8 percent in 2009, the first annual drop in a decade, according to Merrill Lynch’s U.S. Treasury Master index. German bonds returned 1.8 percent, the indexes show.

To contact the reporter on this story: Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net.

Last Updated: November 4, 2009 03:26 EST