Nov. 5 (Bloomberg) -- Treasuries were little changed, snapping a three-day loss, as Asian stocks fell and U.S. legislation to regulate banks added to concern that the pace of the global economic recovery will slow.

U.S. stock index futures also dropped, spurring speculation investors will seek the relative safety of government debt. Yields show traders cut bets on inflation, after wagers reached the highest level in a year yesterday.

“Risk assets are stumbling,” said Peter Jolly, the Sydney-based head of market research for the investment-banking unit of National Australia Bank Ltd., the nation’s third-largest lender by market value. “I’m not sure yields will press too much higher while we’re seeing risk aversion re-emerging in some markets.”

The 10-year note yield declined one basis point to 3.51 percent as of 6:37 a.m. in London, according to data compiled by Bloomberg. The 3.625 percent security maturing in August 2019 rose 3/32, or 94 cents per $1,000 face amount, to 100 29/32.

U.S. stocks erased most of their gains yesterday as a House of Representatives bill to curb credit-card rates spurred concern that it will eat into bank earnings.

Shares Decline

The MSCI Asia Pacific Index of regional shares dropped 0.7 percent today, falling for a third time this week. Futures contracts on the Standard & Poor’s 500 Index slid 0.3 percent, the first loss this week.

The yen rose against the euro as the slide in stocks increased demand for the Asian currency as a refuge. Japan’s currency strengthened to 134.33 per euro from 134.85 yesterday in New York.

Gold fell to $1,086.92 an ounce from yesterday’s record of $1,097.72 an ounce.

The U.S. economy will expand 2.4 percent this quarter, according to a Bloomberg survey of banks and securities companies, after growing 3.5 percent from July through September. The figure snapped a yearlong contraction in gross domestic product.

Federal Reserve efforts to spur the economy are leading some investors to predict inflation will pick up. Inflation erodes the value of a bond’s fixed payments.

The central bank repeated yesterday that it will keep interest rates near zero for “an extended period” to spur growth following the steepest U.S. economic recession since the 1930s.

“They’re probably prepared to trade off the risk of a bit higher inflation down the track to ensure that the recovery gets a stronger foothold,” said Glenn Feben, who helps manage about $5 billion of debt in Melbourne for Perennial Investment Partners Ltd. “You don’t want to get caught with long-term investments when you do really start to see some upward pressure on rates.”

Inflation Expectations

The difference between rates on 10-year notes and Treasury Inflation Protected Securities, or TIPS, which reflects the outlook among traders for consumer prices, was 2.12 percentage points. The spread widened to 2.14 percentage points yesterday, the most since September 2008.

Ten-year yields will rise to 3.80 percent by the middle of next year, according to a Bloomberg survey of banks and securities companies, with the most recent forecasts given the heaviest weightings.

U.S. Data

Government reports today and tomorrow will show U.S. job losses are slowing, according to economists.

Initial claims for jobless benefits fell by 8,000 last week to 522,000, according to the median forecast in a Bloomberg News survey of economists before the Labor Department issues the figure today. Labor Department data tomorrow may show payrolls fell by 175,000 in October, the smallest decline in more than a year.

Benchmark 10-year notes fell for a third day yesterday after the Fed statement and as the U.S. announced plans to sell $81 billion in notes and bonds next week.

The gap in yields between two- and 10-year notes widened to 2.65 percentage points yesterday, the most since July 28. Two- year yields tend to follow what the Fed does with interest rates, while rates on longer-maturity securities are more influenced by the outlook for inflation.

“The longer the Fed doesn’t change anything in terms of their assessment, it pushes rate hikes out into the future,” said Christopher Bury, co-head of fixed-income rates at Jefferies & Co., one of the 18 primary dealers that trade with the central bank. “To the extent the market is worried that they’d be behind the curve and late to tighten, that would be inflationary.”

Yield Curve

The difference in yield between two-year and 10-year Treasury notes may widen to a record, according to Morgan Stanley, another primary dealer.

The spread will increase beyond 3.50 percentage points in first half of 2010, James Caron, head of U.S. interest-rate strategy in New York, wrote in an e-mailed note. The so-called yield curve reached a record high 2.76 percentage points on May 27, based on closing levels.

A revival in the U.S. economy this year has still left Treasury returns behind corporate bonds. U.S. government have handed investors a 3.1 percent loss in 2009, versus a 23 percent gain for an index of company bonds, according to indexes compiled by Merrill Lynch & Co. German government securities returned 1.4 percent, while Japanese bonds are little changed, the Merrill indexes show.

To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.

Last Updated: November 5, 2009 01:38 EST