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Treasuries Poised for Weekly Advance on European Debt Concern

Treasuries headed for the biggest weekly gain in six weeks on speculation European countries are struggling to contain the region’s debt crisis, boosting demand for the safety of U.S. government debt.

The benchmark 10-year yield was six basis points from a two-month low after Luxembourg’s Jean-Claude Juncker, who leads the group of euro-area finance ministers, said the region is close to a recession. Treasuries pared this week’s gains today as speculation the U.S. economy is gaining momentum reduced investor appetite for safer assets.

“Investors are growing increasingly skeptical a solution will be found to the euro-land problems, hence we saw a renewed flight to quality and Treasuries seem to be the primary beneficiary” this week, said Nick Stamenkovic, a fixed-income strategist at RIA Capital Markets Ltd. in Edinburgh. “Ten-year Treasuries will struggle to hold below 2 percent given the improving near-term outlook for the U.S. economy.”

The 10-year yield climbed one basis point, or 0.01 percentage point, to 1.92 percent at 7:25 a.m. New York time, according to Bloomberg Bond Trader prices. The 2 percent note due November 2021 fell 3/32, or 94 cents per $1,000 face amount, to 100 22/32.

The yield has dropped 14 basis points this week, set for the biggest weekly slide since the period ended Nov. 4. It declined to 1.86 percent yesterday, the lowest since Oct. 5.

Europe Recession

The euro region is “on the brink of a recession,” Juncker told reporters today in Luxembourg. European Central Bank President Mario Draghi said yesterday a short-term contraction in the euro-area may be “unavoidable.”

“I don’t think there’s anything that we’re going to see in Europe over the next couple of quarters other than probably, at the very least, a modest contraction,” Russ Koesterich, global chief investment strategist at the IShares unit of BlackRock Inc., the world’s biggest asset manager, said in an interview on Bloomberg Television’s “First Up.”

Treasuries have returned 9.8 percent this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds gained 9 percent.

Ten-year notes trimmed this week’s gains today amid optimism the world’s largest economy is gaining momentum.

U.S. consumer prices rose 0.1 percent last month after falling 0.1 percent in October, according to a Bloomberg survey of economists before today’s Labor Department report. Gross domestic product will expand 2.19 percent in 2012 after growing 1.8 percent this year, according to Bloomberg forecasts.

Jobless claims

U.S. data yesterday showed initial jobless claims fell and manufacturing in the regions covered by the Federal Reserve Banks of New York and Philadelphia improved more than forecast in December.

“It’s a bit of risk very lightly creeping back on and that’s just taking some of the wind out of Treasuries’ sails,” said Eric Wand, a fixed-income strategist at Lloyds Bank Corporate Markets in London. “Collateral demand is there across all the markets so that should keep the front end of the Treasury curve relatively underpinned and 10-years will probably take most of the strain if we do see some decent data.”

The 10-year yield will increase to 2.17 percent by March 31 and 2.36 percent by the end of June, according to a Bloomberg survey of financial companies with the most recent forecasts given the heaviest weightings.

Biggest Gain

Inflation-linked debt has returned 14 percent to investors this year, set for the biggest annual gain since 2002, according to an index compiled by Bank of America Merrill Lynch.

The government is scheduled to sell $35 billion of two-year notes on Dec. 19, the same amount of five-year securities the next day and $29 billion of seven-year debt on Dec. 21.

The Fed is replacing $400 billion of shorter maturities in its holdings of Treasuries with longer-term debt to cap borrowing costs in a plan it announced in September.

The central bank is today scheduled to buy as much as $2.75 billion of debt due from 2036 to 2041, and up to $5 billion of notes maturing between 2020 and 2021 as part of the program, according to the New York Fed’s website.

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