Treasuries are off to their worst start since 2003 on signs the U.S. economy is strengthening and Europe is moving closer to resolving its debt crisis.

Treasury 10-year notes fell for a third day as a U.S. report showed home sales rose for a third month in December, adding to signs including falling claims for jobless benefits that the world’s largest economy is gaining momentum. Greek officials held debt-swap talks for a third day after Spain and France sold bonds at lower yields yesterday.

“The lack of blowups in European sovereign debt have allowed calm to erupt, and that has weighed on Treasuries,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, which oversees $12 billion in fixed-income assets. “Home sales are improving, though from very poor levels, which underlies the improving data we’ve had of late,”

The benchmark 10-year yield rose five basis points, or 0.05 percentage point, to 2.03 percent at 3:02 p.m. in New York, according to Bloomberg Bond Trader prices. The 2 percent note due in November 2021 was down 13/32, or per $4.06 per $1,000 face amount, to 99 25/32. The yield increased 16 basis points this week, the most since the five-day period ended Dec. 23.

U.S. government securities lost 0.342 percent this year, the most since a 0.693 percent loss in 2003, according to Bank of America Merrill Lynch. Treasuries finished 2003 returning 2.25 percent despite the weak start and have posted annual gains every year but one since 2009, when they fell 3.7 percent in 2009. U.S. corporate bonds returned 0.5 percent this year and German bunds fell 0.1 percent, the indexes show.

Widening Spread

The difference between two- and 10-year yields widened one basis point to 1.79 percentage points, the most since Dec. 13. The spread was as narrow as 1.47 percentage points on Oct. 4.

The Citi Macro Risk Index dropped to a five-month low of 0.601 yesterday, showing increased demand for higher-yielding assets.

“Domestic data has been reasonably good and that’s been a catalyst to the selloff in Treasuries,” said Eric Wand, a fixed-income strategist at Lloyds Bank Corporate Markets in London. “Risk sentiment has been generally positive this week, which reduces the safe-haven bid, pushing yields higher.”

Initial jobless claims plunged to 352,000 in the week ended Jan. 14, the lowest level since April 2008, the Labor Department said yesterday. A Federal Reserve report on Jan. 18 showed factory output increased.

Labor ‘Traction’

“There is some significant traction in the labor market,” said Richard Gilhooly, an interest-rate strategist at Toronto- Dominion Bank’s TD Securities Inc. in New York. “There is beginning to be some consistency and some acceleration in the U.S. economic numbers. Once we get through the first quarter, you should get a big spike in Treasury yields.”

Read More: http://www.bloomberg.com/news/2012-01-20/treasuries-set-for-biggest-weekly-loss-in-a-month-before-home-sales-data.html