(Bloomberg) -- Treasuries are the world’s worst- performing bonds this quarter amid concern investors are underestimating risk the Federal Reserve will raise borrowing costs next year.

U.S. 10-year yields rose alongside those of European bonds, reaching the highest in a month, before the government auctions $21 billion of the securities. Adding to the case for the Fed to raise rates, analysts said data this week will show jobless claims fell and retail sales improved. Euro-area bonds outperformed Treasuries this year on speculation the European Central Bank would ease policy to boost the economy.

“We are seeing a big divergence in monetary policy, and also in the business cycle,” said Christoph Kind, head of asset allocation at Frankfurt Trust in Frankfurt, which manages about $20 billion. “The ECB is cutting rates and nothing like that is happening in the U.S. There are very good arguments for Treasuries to underperform.”

The U.S. 10-year yield rose two basis points, or 0.02 percentage point, to 2.52% at 7:19 a.m. New York time, the highest since Aug. 5, according to Bloomberg Bond Trader data. The price of the 2.375% note due in August 2024 fell 5/32, or $1.56 per $1,000 face amount, to 98 23/32. The Treasury’s sale of 10-year notes today will be the second of three auctions of coupon-bearing debt this week.

WORST PERFORMER

Treasuries have returned 0.4% since June 30, the worst result of 26 sovereign bond markets tracked by Bloomberg and the European Federation of Financial Analysts Societies.

Euro-area government bonds made 2.4% in that period, according to the Bloomberg Eurozone Sovereign Bond Index. Spanish securities led losses in Europe today, with the 10-year yield rising eight basis points to 2.28%.

The appeal of U.S. government securities is waning amid signs the economy is improving.

Initial jobless claims fell last week, according to a Bloomberg News survey before tomorrow’s Labor Department report. The Commerce Department will say on Sept. 12 that retail sales increased 0.6% last month after stagnating in July, according to a separate survey.

The yield spread between two- and 10-year Treasuries widened to 196 basis points, the most since Aug. 21. The so- called steeper yield curve suggested investors sought higher returns on longer-maturity debt to compensate for acceleration in inflation as growth picks up.

FED BELTS

Researchers at the San Francisco Fed wrote a report released this week that “the public might not give enough weight to how dependent the central bank’s guidance is on both current and incoming data.”

Traders see a 79% chance the Fed will increase its benchmark rate to at least 0.5% by September 2015, federal fund futures data showed yesterday. That compares with a 73% probability seen on Aug. 29. Policy makers have kept their target for overnight lending between banks in a range of zero to 0.25% since December 2008.

Jeffrey Gundlach, the co-founder and chief executive officer at DoubleLine Capital, said in a webcast that 10-year Treasury yields may climb to 2.65%.

Gundlach’s $35-billion Total Return Bond Fund has returned 5.2% this year, outperforming 94% of its peers. Over three years, the fund’s 4.9% annualized returns have beaten 94% of comparable funds, according to data compiled by Bloomberg.

The weighted average forecast in a Bloomberg survey of analysts is for yields to rise to 2.89% by the end of 2014. They were as low as 2.30% in August.

SPREAD NARROWS

Investors should consider betting against five-year notes, said John Gorman, head of dollar interest-rate trading for Asia and the Pacific at Nomura Holdings in Tokyo. Because of their shorter maturity, they’re more sensitive to what the Fed does with its target for overnight lending. Ten-year notes offer a higher yield that will attract investors, he said.

Demand for longer maturities has narrowed the difference between five- and 10-year yields to 75 basis points. The spread contracted to 69 basis points on Aug. 28, the least since January 2009. A basis point is 0.01%age point.

U.S. government securities maturing in three-to-five years have lost 0.2% this quarter, the biggest decline among 144 debt indexes compiled by Bloomberg and EFFAS.

The U.S. sold $27 billion of three-year notes yesterday at the highest yield since April 2011. The government will auction $13 billion of 30-year bonds tomorrow.

Treasuries due in a decade were last sold on Aug. 13 at a high yield of 2.439%, the lowest at the monthly auctions since June 2013. The bid-to-cover ratio was 2.83, the strongest demand since June 11 this year.

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