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Treasuries Advance as Europe Growth Concerns Boost Safety Demand

Treasuries rose, extending gains after their best month in more than two years, as a report showed European manufacturing shrank more than initially estimated in August, fueling concern global growth is slowing.

Longer-maturity debt led the advance as European shares and U.S. stock futures fell, halting a rally in equities around the world. Economists say reports this week will show U.S. manufacturing contracted and job growth slowed. Treasuries handed investors a return of 2.8 percent in August, the best month since December 2008, according to indexes compiled by Bank of America Merrill Lynch.

“Clearly the risks are to the downside and the flight to quality may extend further,” said Michael Leister, a fixed-income strategist at WestLB AG in London. “We believe that yields on both 10-year Treasuries and 10-year bunds are likely to dip below the 2 percent level again.”

The benchmark 10-year yield fell four basis points to 2.19 percent at 7:01 a.m. in New York, according to Bloomberg Bond Trader prices. The 2.125 percent note maturing in August 2021 rose 10/32, or $3.13 per $1,000 face amount, to 99 14/32.

Yields declined 57 basis points last month, the most since a 71 basis-point drop in December 2008. Ten-year rates slid to a record low of 1.97 percent on Aug. 18.

The Stoxx Europe 600 Index slid 0.5 percent, while futures on the Standard & Poor’s 500 Index declined 0.4 percent. German 10-year bund yields slipped six basis points to 2.16 percent.

Manufacturing, Jobs

A manufacturing gauge based on a survey of purchasing managers in the 17-nation euro region fell to 49 from 50.4 in July, Markit Economics said today. That’s below an initial estimate of 49.7 published on Aug. 23. A reading below 50 indicates contraction.

The Institute for Supply Management will say today that its U.S. factory index slid to 48.5 in August from 50.9 in July, according to a Bloomberg survey of economists. U.S. employers added 70,000 workers after a 117,000 increase in July, a separate survey showed before the Labor Department releases the data tomorrow. Private hiring, which excludes government jobs, rose 100,000 after a gain of 154,000 in the prior month, the report may also show.

The August rally in Treasuries, the sharpest monthly advance since the depths of the financial crisis, came as bond investors cut expectations for inflation.

Operation Twist

The break-even inflation rate, the yield difference between 10-year Treasury notes and inflation-indexed U.S. government bonds of similar tenor was 2.02 percent today, after falling to 1.96 percent on Aug. 18, the lowest since October. It has averaged 2.06 percentage points over the past five years.

“Almost everyone is unhappy with the current yield level,” said Sungjin Park, who heads the $58.1 billion debt division in Seoul at Samsung Asset Management Co., South Korea’s largest private bond investor. “Treasuries are expensive.”

Fed Bank of Atlanta President Dennis Lockhart said yesterday the central bank should be ready to consider more monetary easing even while it can’t be expected to eliminate some of the forces impeding economic growth.

“Given the weak data we’ve seen recently and considering the rising concern about chronic slow growth or worse, I don’t think any policy option can be ruled out at the moment,” he said in a speech in Lafayette, Louisiana.

Instead of conducting another large-scale round of quantitative easing, the Fed may sell shorter-term securities held in its portfolio and buy longer-dated bonds in a so-called operation twist, said Hiroki Shimazu, an economist in Tokyo at SMBC Nikko Securities Inc., a unit of Japan’s third-largest publicly traded bank by assets.

“That may push down yields of long-term bonds and flatten the yield curve for a short period,” Shimazu said.

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