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Treasuries Snap Two-Day Decline Before Consumer Prices

Treasuries snapped a two-day loss before a government report today that economists said will show U.S. inflation is in check.

Benchmark 10-year yields climbed to 1.74 percent yesterday, surpassing increases in the consumer price index. CPI gains slowed to 1.6 percent in July compared with a year earlier, from 1.7 percent in June, according to a Bloomberg News survey of economists before the Labor Department report at 8:30 a.m. in Washington. Prices rose 0.2 percent in July from June, the survey shows, the first advance since March.

“We’re in a disinflationary environment,” said Hans Goetti, the Singapore-based chief investment officer for Asia at Finaport Investment Intelligence, which manages the equivalent of $1.44 billion. “This is a good time to buy” Treasuries.

Ten-year yields declined 1 1/2 basis points from yesterday’s close to 1.72 percent as of 7 a.m. in London, according to Bloomberg Bond Trader data. The price of the 1.625 percent security due in August 2022 rose 1/8, or $1.25 per $1,000 face amount, to 99 3/32.

Japan’s 10-year yield rose 2 1/2 basis points to 0.815 percent, the most in almost six weeks. A basis point is 0.01 percentage point.

Household Debt

U.S. 30-year yields, little changed at 2.82 percent, may drop to 2 percent in the years ahead, Goetti said. Households are cutting debt and governments may do the same, creating a period of deleveraging that is keeping inflation under control, he said. Goetti said he bought Treasuries more than a year ago and is considering purchasing more.

A gauge of U.S. household indebtedness fell for a record 12 quarters to the lowest level since 1994. The ratio of household debt payments to disposable income declined to 10.98 in the first quarter, down from a peak of 13.96 in September 2007, according data from the Federal Reserve.

Today’s reports will also probably show factory production expanded and homebuilder confidence stabilized in the U.S., according to separate Bloomberg surveys of economists.

The Fed plans to sell as much as $8 billion of notes due from February 2014 to August 2014 today, according to the website of its New York branch. The sales are part of the central bank’s effort to support the economy by swapping shorter-term Treasuries in its holdings for securities due in 6 to 30 years to cap long-term borrowing costs.

Improving Economy

Ten-year yields have climbed from the record low of 1.38 percent set July 25 on signs the U.S. economy is improving.

The U.S. added 163,000 jobs last month, a government report showed Aug. 3, more than the 100,000 projected by analysts. Retail sales rose 0.8 percent, the biggest increase since February, Commerce Department figures showed yesterday.

“Yields are going to rise,” said Hideo Shimomura, who helps oversee the equivalent of $76.1 billion in Tokyo as chief fund investor at Mitsubishi UFJ Asset Management Co., part of Japan’s largest publicly traded bank. “There’s not a recession. Inflation’s not a problem, but inflation expectations are heading north.”

Shimomura said he’d like to wait until 10-year yields advance to 1.8 percent before adding to his holdings. A Bloomberg survey of economists shows the rate will be 1.78 percent by year-end, with the most recent projections given the heaviest weightings.

The yield will be more than 2 percent next year, Dominic Konstam, the global head of interest-rate research in New York for Deutsche Bank AG, wrote in the report yesterday. The bank is one of the 21 primary dealers that underwrite the U.S. debt.

Producer Prices

The producer price index rose 0.3 percent in July from the month before, after an increase of 0.1 percent in June, the Labor Department reported yesterday in Washington. The median estimate in a Bloomberg survey of economists was a 0.2 percent gain. Core prices, which exclude volatile food and energy costs, climbed 0.4 percent, the most since January.

The difference between 10-year yields on Treasury Inflation-Protected Securities and conventional U.S. government securities has widened to 2.27 percentage points from as low as 1.98 on July 26. The spread represents the expected rate of price gains for the life of the debt.

The Fed’s favored bond-market gauge of inflation expectations was 2.54 percent on Aug. 10, up from 2.38 percent on July 26 and matching the average for 2012. That puts the measure above the 2 percent levels in 2008 and 2010 that led the central bank to pump $2.3 trillion into the economy by purchasing Treasuries and mortgage-related bonds, the policy known as quantitative easing. The five-year, five-year measure shows how much traders anticipate consumer prices will rise during a period of five years starting in 2017.

Demand for inflation protection has pushed an index of TIPS to a 4.8 percent gain this year, according to Bank of America Merrill Lynch indexes. Conventional Treasuries returned 1.7 percent, the figures show.

The Treasury is scheduled to announce tomorrow the size of a five-year TIPS sale scheduled for Aug. 23.

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