Oct. 3 (Bloomberg) -- Treasury yields declined to the lowest levels since May as reports on employment, manufacturing and housing bolstered speculation that the recovery from the worst financial crisis in seven decades may falter.

Ten-year note yields fell to the least since May 18 yesterday after the Labor Department said U.S. job losses accelerated last month and the unemployment rate climbed to the highest level since 1983. Thirty-year bond yields dropped below 4 percent the day before for the first time since April. Yields slumped even with the Treasury scheduled to sell $78 billion in notes and bonds next week.

“The Treasury market is still perceived as a safe place to put your money,” said Christopher Sullivan, who oversees $1.4 billion as chief investment officer at United Nations Federal Credit Union in New York. “One of the main reasons is because inflation is not perceived as a high risk right now.”

The yield on the benchmark 10-year note fell 16 basis points, or 0.16 percentage point, to 3.22 percent this week, according to BGCantor Market Data. The 3.625 percent security rose 1 11/32, or $13.44 per $1,000 face amount, to 103 12/32. The yield declined to 3.1 percent yesterday.

Thirty-year bond yields dropped nine basis points to 3.99 percent, and touched 3.89 percent yesterday. Two-year note yields fell 12 basis points to 0.87 percent, after dropping as low as 0.83 percent yesterday, the least since May 21.

U.S. employers cut 263,000 positions last month, bringing the total jobs lost since the recession began in December 2007 to 7.2 million, the biggest drop since the Great Depression. The unemployment rate rose to 9.8 percent from 9.7 percent.

‘Cheaper Levels’

Treasuries erased the initial gains posted after the employment report as investors began to focus on next week’s auctions.

The U.S. will sell $39 billion of three-year notes, $20 billion in 10-year securities, $12 billion in 30-year bonds and $7 billion of 10-year Treasury Inflation Protected Securities over four consecutive days beginning Oct. 5. The Treasury sold $73 billion of the maturities the week of July 6, the last time the four securities were offered in the same week.

“I don’t like the level of rates where we are here,” said Michael Devlin, a Treasury trader with Jefferies & Co. in New York, one of 18 primary dealers that trade with the Federal Reserve. “I think the street would like a pullback, and to buy these at cheaper levels than we have now.”

The 10-year yield will close 2009 at 3.58 percent, according to a Bloomberg survey of banks and securities dealers, with the most recent forecasts given the heaviest weightings. Two-year yields will increase to 1.18 percent.

‘Yield Grab’

Treasuries handed investors a return of 2.1 percent in the period from July to September, according to Merrill Lynch & Co. indexes, as signs the recovery may be slow drove speculation the Federal Reserve will keep interest rates near historic lows. That was the strongest three-month performance since the last quarter of 2008.

“A worldwide yield grab is under way,” said Tony Crescenzi, a market strategist and portfolio manager at Newport Beach, California-based Pacific Investment Management Co. “The Federal Reserve has put a ‘curse on cash,’ pushing investors to move out the risk spectrum for additional yield. In Treasuries, increasing one’s risk is accomplished by moving out the yield curve.”

Treasuries fell 4.5 percent in the first six months of the year, according to Merrill data. For the year Treasuries have slipped 2.4 percent, their worst performance to this point since 1994, when they had lost 3.7 percent.

Record Sales

Treasuries’ third-quarter gain came even as the government sold $554 billion of notes and bonds, the most ever in a quarter. At the same time the dollar dropped against most of its major counterparts and posted a second straight quarterly loss.

So far this year, U.S. sold $1.517 trillion of notes and bonds, compared with $585 billion at the same point last year. Primary dealer Barclays Plc forecasts total 2009 issuance at $2.1 trillion, with $2.5 trillion projected for 2010.

President Barack Obama has pushed the nation’s marketable debt to an unprecedented $6.94 trillion in an effort to spur economic growth, support the financial system and service record deficits. The U.S. budget deficit is projected to increase to $1.6 trillion this year, equivalent to 11.2 percent of the nation’s economy, according to the nonpartisan Congressional Budget Office.

Writedowns, Credit Losses

Reports this week showed the Chicago Purchasing Managers index unexpectedly fell in August. The S&P/Case-Shiller home- price index fell 13.3 percent in July from a year earlier, less than economists forecast.

The economic crisis, which started with the collapse of the U.S. real estate market in 2007, triggered $1.62 trillion of writedowns and credit losses at financial institutions, sending the global economy into its first recession since World War II.

“We’re going to see continued bull flattening in the Treasury market and riskier assets are going to struggle,” said Carl Lantz, an interest-rate strategist in New York at primary dealer Credit Suisse Group AG. This will spark asset re- allocation as “accounts are overweight equities and underweight bonds,” he said.

To contact the reporters on this story: Daniel Kruger in New York at dkruger1@bloomberg.net; Cordell Eddings in New York at ceddings@bloomberg.net.

Last Updated: October 3, 2009 00:00 EDT