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U.S. 10-Year Yield Reaches 16-Month Low; Global Buying May Rise

PIMCO CEO Mohamed El-Erian
“Investors should own less equities, more bonds, more global investments, more cash and more dry ammunition,” Mohamed A. El-Erian said. Photographer: Jonathan Alcorn/Bloomberg

Treasury 10-year yields fell to their lowest level in more than 16 months before a government report that economists said will show global purchases of U.S. financial assets increased in June.

Two-year rates were three basis points away from a record low as the Federal Reserve prepared to buy Treasuries this week as part of its plan to spur the slowing economy by keeping borrowing costs low. The central bank will purchase notes due from 2014 to 2016 tomorrow and debt due in 2016 to 2020 on Aug. 19, according to the Fed Bank of New York’s website. Thirty-year yields fell to the lowest level since April 2009.

“The fears about the economy are not going to vanish any time soon, so Treasuries keep a bid,” said Vincent Chaigneau, head of foreign exchange and interest-rates strategy at Societe Generale SA in London. “There’s not much room for movement at the short end, so we are seeing some bull flattening into the 10-year area.”

Benchmark 10-year note yields fell three basis points to 2.64 percent as of 6:44 a.m. in New York, according to BGCantor Market Data. That’s the lowest since April 2009, generic data compiled by Bloomberg show. The 2.625 security due in August 2020 rose 8/32 or $2.50 per $1,000 face amount, to 99 28/32.

Two-year debt yielded 0.52 percent, versus the record of 0.4892 set Aug. 11. The 30-year yield slid as low as 3.8 percent.

The difference in yield, or spread, between 10-year and 30-year Treasuries narrowed for the fourth-straight day after reaching 128 basis points on Aug. 10, the most since at least 1991. U.S. 10-year yields will fall to 2.5 percent in the coming months on signs the economy is deteriorating, according to Chaigneau.

The Stoxx Europe 600 Index fell 0.3 percent, stoking demand for the safety of fixed-income securities.

Manufacturing, Building

Manufacturing in the New York region probably expanded at a faster pace in August, a report is forecast to show today. The Federal Reserve Bank of New York’s general economic index rose to 8.3 from 5.1 in July, according to the median of 43 estimates in a Bloomberg survey of economists. Readings greater than zero signal expansion.

Builders in the U.S. turned less pessimistic in August, a separate survey showed before a report from the National Association of Home Builders/Wells Fargo. The confidence index rose to 15 from 14 in July, the median of 39 economists estimates showed. Readings lower than 50 mean more respondents said conditions were poor.

Investors in a weekly survey by Ried Thunberg ICAP, a unit of ICAP Plc, the world’s largest inter-dealer broker, stuck to their bearish outlook following the market rally, the company said. Ried’s index on the outlook for Treasuries through December was unchanged at 44 for the seven days ended Aug. 13 versus the week before. A figure less than 50 shows investors expect prices to fall.

Treasury Returns

Treasuries have returned 7.6 percent this year, according to indexes compiled by Bank of America Merrill Lynch, as investors sought the relative safety of debt while equities tumbled. MSCI’s World Index of shares has fallen 4.1 percent in 2010, including reinvested dividends.

International investors bought $45.7 billion more long-term U.S. notes, bonds and stocks than they sold in June, rising from $35.4 billion in May, according to a Bloomberg News survey of economists before the Treasury Department report today.

Money managers are moving more money than ever out of stocks and into bonds. About $185 billion was sent to bond funds through July 31, the most on record, according to the Investment Company Institute.

“Investors should own less equities, more bonds, more global investments, more cash and more dry ammunition,” Mohamed A. El-Erian, chief executive officer at Pacific Investment Management Co., said in an interview that USA Today published on its website yesterday. Pimco, in Newport Beach, California, manages the world’s biggest mutual fund.

‘More Modest’

“The pace of economic recovery is likely to be more modest in the near term than had been anticipated,” the Fed said Aug. 10. It announced it will invest the principal payments from its holdings of mortgage-backed securities into longer-term Treasury securities in the same statement.

The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices, narrowed to 1.62 percentage points, the lowest since September.

Japan’s economy grew at less than a fifth of the pace last quarter than economists estimated, a government report showed, pushing the nation into third place behind the U.S. and China.

Japanese 10-year bond yields dropped as low as 0.95 percent, the least since 2003, according to Japan Bond Trading Co., the nation’s largest interdealer debt broker.

Fewer Options

Bond investors seeking top-rated securities face fewer alternatives to Treasuries, allowing President Barack Obama to sell unprecedented sums of debt at ever lower rates to finance a $1.47 trillion deficit.

While net issuance of Treasuries will rise by $1.2 trillion this year, the net supply of corporate bonds, mortgage-backed securities and debt tied to consumer loans may recede by $1.3 trillion, according to Jeffrey Rosenberg, a fixed-income strategist at Bank of America in New York. The company is one of the 18 primary dealers that are required to bid at the government’s debt sales.

Shrinking credit markets help explain why some Treasury yields are at record lows even after the amount of marketable government debt outstanding increased by 21 percent from a year earlier to $8.18 trillion.

“The number-one fixed-income conundrum is ‘Where do I go?’” said Mitchell Stapley, the chief fixed-income officer for Fifth Third Asset Management, who oversees $22 billion in assets. In credit markets, “the supply of sleep-at-night-quality bonds has just collapsed,” he said in an interview from Grand Rapids, Michigan.

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