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Treasury 10-Year Yields Fall a Third Day Before Inflation Report

Treasury 10-year yields fell for a third day before reports forecast to show U.S. inflation is in check as the economy expands.

Two-year notes maintained a two-day gain as Europe’s debt crisis fueled demand for the relative safety of Treasuries. Treasuries advanced even as the International Monetary Fund was said to propose a $500 billion expansion of its lending resources.

“The market will look at the economic data, which needs to surprise to move Treasuries out of their recent trading range,” said Marc Ostwald, a fixed-income strategist at Monument Securities Ltd. in London. Shorter maturity notes are being “supported by bank buying for balance-sheet purposes and by investors being super-defensive.”

Ten-year yields fell two basis points, or 0.02 percentage point, to 1.84 percent at 7:31 a.m. New York time, according to Bloomberg Bond Trader prices. The 2 percent security due November 2021 gained 6/32, or $1.88 per $1,000 face amount, to 101 14/32. The rate fell to 1.80 percent on Dec. 19, the least since Oct. 4.

The two-year note yield was little changed at 0.22 percent. That compares with a record 0.143 percent reached Sept. 20.

Inflation Outlook

U.S. producer prices increased 0.1 percent in December after a 0.3 percent gain the previous month, the median forecast of economists surveyed by Bloomberg News showed before the report today.

Consumer prices rose 0.1 percent last month after being unchanged in November, according to a separate survey before the data’s release tomorrow. The U.S. jobless rate has been more than 8 percent for almost three years.

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, was 2.03 percentage points. The average over the past decade is 2.13 percentage points.

Pacific Investment Management Co.’s Bill Gross said yesterday that credit-rating cuts in Europe may lead some investors to purge the region’s bonds from their holdings.

“There are regulatory issues in the case of structures that are dependent on certain types of ratings and to the extent that various countries get downgraded, then those positions have to be reduced,” he said in a radio interview on “Bloomberg Surveillance” with Tom Keene and Ken Prewitt.

IMF Proposal

The IMF is proposing a $500 billion expansion of its lending resources to safeguard the global economy against any worsening of Europe’s debt crisis, according to an official at a Group of 20 nation.

The Washington-based lender is pushing China, Brazil, Russia, India, Japan and oil-exporting nations to be the top contributors, according to the official, who spoke on condition of anonymity because the talks are private. The fund wants the agreement struck at the Feb. 25-26 meeting of G-20 finance ministers and central bankers in Mexico City, the official said.

Standard & Poor’s on Jan. 13 cut the debt grades of several euro-area nations including France, Italy, Portugal and Spain, while affirming Germany’s AAA ranking.

Overseas demand for U.S. assets probably increased in November, according to a Bloomberg survey of economists before a Treasury Department report today.

Net purchases of long-term U.S. bonds, stocks and other assets by investors outside the nation rose to $40 billion from $4.8 billion in October, based on the median estimate.

Faster Growth

The appeal of Treasuries is diminishing among some investors as the world’s biggest economy gains momentum.

Output at factories, mines and utilities rose 0.5 percent last month after dropping 0.2 percent in November, the median projection of economists in another poll showed before figures from the Federal Reserve today.

“We’re getting good data,” said Ali Jalai, a Treasuries trader in Singapore at Scotia Capital Inc., a unit of one of the 21 primary dealers that underwrite the U.S. debt. “Yields are low. I don’t see why people are buying them.” Ten-year rates may rise to 2.2 percent by March 31, he said.

The world economy will grow 2.5 percent this year, the World Bank predicted, down from a June estimate of 3.6 percent. The bank sees the euro area contracting 0.3 percent in 2012, compared with a previous estimate of 1.8 percent growth. The U.S. outlook was cut to an expansion of 2.2 percent from 2.9 percent, according to a report the bank published yesterday in Washington.

Fed Purchases

The Fed has said it will keep its target rate for overnight loans between banks between zero and 0.25 percent through mid-2013, and is now selling $400 billion of its short-term Treasuries and reinvesting the proceeds into longer-term government debt in a program traders dubbed Operation Twist.

The Fed is scheduled to buy as much as $5 billion of securities due from 2020 to 2021 today as part of a program to cap borrowing costs. The central bank will also sell as much as $8.75 billion of debt due from 2013 to 2014, according to the New York Fed’s website.

Thirty-year bonds advanced yesterday as the Fed began four consecutive days of purchasing debt. The yield was little changed at 2.89 percent today.

“We are at yield levels where the downside reward in yield terms looks limited,” Monument’s Ostwald said. “The upside for yields, particularly at the long end, is capped as the Fed is still conducting its twist operation.”

The next auction will be for $15 billion of 10-year TIPS tomorrow. The U.S. is scheduled to sell two-, five- and seven-year securities over three days starting Jan. 24.

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