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Treasuries Snap Gain on Speculation Manufacturing Quickened

Treasury 30-year bonds snapped yesterday’s steepest rally since March 2009 before data that economists said will show manufacturing quickened in October.

Bill Gross, manager of the world’s biggest bond fund at Pacific Investment Management Co., said the Federal Reserve’s willingness to increase debt purchases as it tries to spur the economy would boost the inflation rate and Treasury yields. Fed policy makers are scheduled to begin a two-day meeting today.

“Yields will go up,” said Kei Katayama, leader of the foreign fixed-income group at Daiwa SB Investments Ltd. in Tokyo, which has the equivalent of $63.2 billion in assets including Japan’s second-biggest bond fund. “The U.S. economy is not strong, but it’s not so bad.”

The 30-year rate was little changed at 3.13 percent as of 7:10 a.m. in London, according to Bloomberg Bond Trader prices. The 3.75 percent security due in August 2041 traded at 111 30/32. The yield dropped yesterday by 25 basis points, or a quarter of a percentage point.

Benchmark U.S. 10-year rates held at 2.11 percent.

Treasuries recouped losses sustained in early Asian trading as Japan’s intervention in currency markets yesterday raised speculation the nation would use newly purchased dollars to to buy American securities.

U.S. government bonds surged yesterday on concern Europe will be unable to curb a sovereign-debt crisis that has left Greece struggling to make payments, increasing demand for the relative security of American bonds.

Greek Prime Minister George Papandreou pledged to hold a referendum on the European Union’s latest accord on his nation’s financing. The decision risks pushing the country into default if rejected by voters.

Europe Effect

“While this European situation is going on, it’s hard for Treasuries to sell off,” said Grant Hassell, head of fixed income at AMP Capital Investors in Wellington, New Zealand.

Ten-year yields may fall toward 2 percent, he said. Investors seeking to shield their money from turmoil in Europe snapped up Treasuries in September, pushing the rate to a record low of 1.67 percent.

The Institute for Supply Management’s U.S. factory index rose to 52 from 51.6 in September, according to the median forecast in a Bloomberg News survey before the report today. A level of 50 is the dividing line between growth and contraction. Construction spending rose in September, another report may show, according to a separate poll.

A Chinese manufacturing index dropped to the lowest level in October since February 2009, the government reported today.

Disproportionate Inflation

“Sovereign monetary and fiscal policies, while generating undersized real growth, have managed to produce disproportionally large inflation,” Pimco’s Gross wrote yesterday in a monthly report on the Newport Beach, California-based company’s website. “Developed economies -- the U.S. included -- have experienced 3 percent plus inflation.”

The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, widened by 32 basis points last month, the most since October 2010. The spread was 2.04 percentage points today, in line with the five-year average.

Fed Vice Chairman Janet Yellen and other policy makers have said the central bank should be prepared to do more to spur growth. Governor Daniel Tarullo and New York Fed President William C. Dudley said last month that additional stimulus may be needed.

Fed Operations

The central bank announced in September it would replace $400 billion of short-term debt with longer-term Treasuries to contain borrowing costs. It plans to sell as much as $8.75 billion of securities due from 2012 to 2013 today under the program, according its website.

Australia’s Reserve Bank cut its benchmark interest rate by a quarter percentage point to 4.5 percent today, the first reduction since April 2009.

U.S. consumer prices rose 3.9 percent in September from a year earlier, meaning 10-year Treasuries yield negative 1.79 percent after accounting for costs in the economy. The figure was minus 2.11 percent in October, a level not seen since 1980.

TIPS returned 1.9 percent last month, versus a 0.8 percent loss for conventional U.S. government debt, according to Bank of America Merrill Lynch indexes.

Thirty-year bonds, those most sensitive to costs in the economy, fell 4.8 percent. German bunds dropped 0.8 percent and Japanese bonds slid 0.2 percent, the Bank of America figures show.

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