Aug. 28 (Bloomberg) -- Treasuries were little changed, interrupting a weekly advance, as investors sought higher returns from corporate bonds and stocks.

Pacific Investment Management Co., which runs the world’s biggest bond fund, said today that Asian bank securities “look attractive” as markets recover from the financial crisis. Kokusai Global Sovereign Open Fund, Asia’s biggest bond fund, and Western Asset Management Co. both said this week that the best value is outside the government debt markets.

“Treasury yields are too low,” said Kazuaki Oh’e, a bond salesman in Tokyo at Canadian Imperial Bank of Commerce, the nation’s fifth-biggest bank. “The economy is recovering. People may switch” to corporate bonds.

The yield on the 10-year note rose two basis points to 3.47 percent as of 7:50 a.m. in London, according to BGCantor Market Data. The 3.625 percent security maturing in August 2019 dropped 1/8, or $1.25 per $1,000 face amount, to 101 10/32.

Yields have declined 10 basis points this week, and one basis point in August, Bloomberg data show.

MSCI’s Asia Pacific Index of regional shares rose 0.5 percent, set for a 2.7 percent weekly advance.

Demand for company debt is reducing the difference in yield between corporate and government bonds. Merrill Lynch & Co’s Global Broad Market Corporate Index yields 2.28 percentage points more than government securities, versus 4.89 percentage points at the end of 2008. The spread was as narrow as 0.66 percentage points in 2007 before the credit crisis began.

Worst Over

“The worst is over,” said Koyo Ozeki, head of credit research for the region at Pimco in Japan. “Asian countries managed to maintain stability in the banking system. Pimco, based in Newport Beach, California, is a unit of Munich-based insurer Allianz SE.

The crisis, which started with the collapse of the U.S. property market in 2007, has triggered $1.61 trillion of writedowns and credit losses at banks and other financial institutions and sent the global economy into its first recession since World War II, according to Bloomberg data.

Kokusai Global Sovereign is buying securities sold by the World Bank and the European Investment Bank for the first time to capture the extra yield they offer over government debt.

Global Sovereign is also purchasing bonds from other development banks, so-called supranational borrowers, including the Nordic Investment Bank and KfW Group in Germany, Masataka Horii, one of the fund’s managers in Tokyo, said Aug. 25.

Western Asset

Western Asset, which oversees $513.3 billion in bonds and is based in Pasadena, California, said yesterday that corporate debt offers the best value in the fixed-income market.

The Merrill corporate index returned 1.6 percent in August, and it has gained almost 13 percent this year. By contrast, the company’s U.S. Treasury Master index, rose 0.6 percent this month, cutting 2009’s loss to 3.5 percent.

German government bonds returned 1.3 percent this year, while Japanese securities were little changed, the Merrill figures show.

Other parts of the credit market are reviving after freezing last year.

U.S. 30-year fixed mortgage rates declined to 5.29 percent from this year’s high of 5.74 percent in June, according to Bankrate.com in North Palm Beach, Florida.

The London interbank offered rate, or Libor, for three- month dollar loans fell to a record 0.36 percent yesterday. It was 1.425 percent at the end of last year.

Inflation Outlook

Treasuries rose this week after a government official spurred expectations among investors that inflation will remain in check.

Projections for the consumer price index show a contraction of 0.7 percent this year, an increase of 1.4 percent next year and 1.5 percent in 2011, Christina Romer, White House chief economist, said Aug. 25 in Washington.

Consumer spending increased in July at half the pace of the previous month, a sign the biggest part of the economy will be slow to rebound, economists said before the Commerce Department report today.

Slowing inflation will push 10-year yields down to 3.25 percent by year-end, said Hidehiko Maejima, international bond strategist in Tokyo at BNP Paribas Securities Japan Ltd., the arm of a U.S. primary dealer that trades directly with the Fed.

He is in a minority. A Bloomberg survey of banks and securities companies projects yields will rise to 3.83 percent, with the most recent forecasts given the heaviest weightings.

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

Last Updated: August 28, 2009 02:53 EDT