(Bloomberg) -- Treasury 10-year yields climbed to the highest level in more than two years as signs of a quickening recovery boosted speculation the Federal Reserve will keep reducing debt purchases.

The benchmark 10-year yield reached 3% for the first time in three months as the Federal Open Market Committee reinforced its commitment last week to keeping interest rates low while announcing it will start reducing bond purchases from January. Two-year notes, which aren’t included in the Fed’s monthly program of asset buying, headed for a fifth weekly decline. Citigroup Inc.’s Economic Surprise Index, which measures if data surpasses or falls short of market expectations, climbed yesterday to the highest level since October.

“The pace of the U.S. economic recovery means there’s room for the 10-year yield to rise further, perhaps towards 3.25% in 2014,” said Soeren Moerch, head of fixed-income trading at Danske Bank A/S in Copenhagen. “I don’t think it will go much higher from there. We expect the Fed to keep official interest rates low for another 18 to 24 months.”

The benchmark 10-year yield rose two basis points, or 0.02%age point, to 3.01% at 7:45 a.m. New York time, reaching the highest level since July 26, 2011. The price of the 2.75% note due in November 2023 slipped 1/8, or $1.25 per $1,000 face amount, to 97 26/32, according to Bloomberg Bond Trader data.

The two-year yield was little changed at 0.40%, having climbed two basis points this week.

Jobless Claims

Initial jobless claims fell by 42,000 to 338,000 in the week ended Dec. 21, the Labor Department said yesterday. Economists surveyed by Bloomberg predicted a decline to 345,000.

The FOMC said after its Dec. 17-18 policy meeting it will begin reducing its $85 billion of monthly asset purchases in January amid “growing underlying strength” in the economy.

The Fed will lower the purchases in $10 billion increments over the next seven meetings before ending the program in December 2014, according to the median forecast in a Bloomberg survey of 41 economists on Dec. 19.

Increasing Treasury yields has driven mortgage rates higher even as 12 of the 17 FOMC members forecast policy tightening will only begin in 2015. Thirty-year fixed mortgage rates rose to 4.56% yesterday, the highest since Sept. 13, according to Bankrate.com.

The Fed said last week it “likely will be appropriate to maintain the current target range for the federal funds rate well past” the 6.5% jobless-rate threshold, especially if inflation stays below the Fed’s 2% target. The benchmark rate has been in a range of zero to 0.25% since December 2008.

Inflation Measure

Inflation as measured by the personal-consumption- expenditures price index was 0.9% for the 12 months ended November, the Commerce Department said Dec. 23. The reading of 0.7% in October was the slowest in four years.

“The yield will go down a little in the first quarter of 2014,” said Allen Lei, a Treasury trader in Taipei at Hontai Life Insurance Co., which manages the equivalent of $6.1 billion. “If inflation data doesn’t improve, I don’t think yields will rise too much.” Ten-year yields may fall to 2.80% in the first three months of next year, he said.

The odds of policy makers increasing their benchmark interest-rate target by January 2015 are 23%, based on data compiled by Bloomberg from futures contracts. The chance was 11% at the end of November.

Treasury trading volume at ICAP Plc, the largest inter- dealer broker of U.S. government debt, fell to $72.7 billion yesterday, the lowest since Dec. 24, 2012. This year’s average is $310 billion.

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