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U.S. Yield Approaches Two-Week Low on Inflation Outlook

Treasury yields were one basis point away from a two-week low as the outlook for contained inflation and slowing global economic growth drove demand for bonds.

U.S. government securities dropped 0.6 percent in August as of yesterday, trimming a loss of as much as 1.6 percent earlier in the month, according to Bank of America Merrill Lynch data. Forecasts for the Federal Reserve to initiate a new round of bond purchases to support the economy helped drive the rebound. An index of bonds around the world that includes government, company and mortgage securities was little changed, reversing losses of as much as 0.6 percent.

“Yields are going to go down,” said Hideo Shimomura, who helps oversee the equivalent of $76.1 billion in Tokyo as chief fund investor at Mitsubishi UFJ Asset Management Co., which is part of Japan’s largest publicly traded bank. “There’s no reason to fear inflation globally.”

Benchmark 10-year yields were little changed at 1.64 percent as of 6:53 a.m. in London, according to Bloomberg Bond Trader data. The price of the 1.625 percent security due in August 2022 was 99 27/32. The rate was as low as 1.63 percent on Aug. 24, a level not seen since Aug. 13.

The record low was of 1.38 percent on July 25. Rates may fall below that level this year, Shimomura said.

Japan’s 10-year yield slid 1/2 basis point to 0.805 percent. It has declined from this month’s high of 0.86 percent on Aug. 16. A basis point is 0.01 percentage point.

Debt Sales

The U.S. plans to sell $35 billion of two-year debt today, the same amount of five-year notes tomorrow and $29 billion of seven-year securities on Aug. 30.

The two-year notes yielded 0.27 percent in pre-auction trading, compared with 0.22 percent at the previous sale on July 24, which was a record low.

Investors bid for 4 times the amount of available debt last month, the most since the all-time high of 4.07 in November at the monthly auctions. Indirect bidders, the category of buyers that includes foreign central banks, purchased 30.9 percent, the least since December.

U.S. consumer prices rose 1.4 percent in July from a year earlier, the smallest gain since November 2010, based on the latest figures from the Labor Department.

The difference between yields on U.S. 10-year notes and same-maturity Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, was 2.31 percent. The average over the past decade is 2.16 percentage points.

Asian Economies

Japan’s government cut its assessment of the world’s third-biggest economy today. China, the second-biggest, faces “difficulties,” Premier Wen Jiabao said, according to Xinhua News Agency Aug. 25. Germany and France are planning measures on European integration as they battle an economic contraction.

An industry report today will show U.S. consumer confidence rose this month, based on a Bloomberg News survey of economists.

Treasury yields that are 26 basis points away from the record low are spurring demand for higher rates than those available from government bonds, said Tomohisa Fujiki, an interest-rate strategist at BNP Paribas Securities Japan Ltd. in Tokyo. The company’s U.S. arm is one of the 21 primary dealers that trade directly with the Fed.

“Some funds shifted to higher yields,” he said. “Equities are doing fine because of expectations for further Fed easing.”

An index of U.S. investment-grade and high-yields bonds returned 0.1 percent this month through yesterday, and is up 8.2 percent in 2012, the Bank of America data show. Treasuries gained 2.1 percent in 2012, based on the data.

The MSCI All-Country World Index of stocks returned 2.9 percent in August as of yesterday, rallying 11 percent this year, according to data compiled by Bloomberg.

Jackson Hole

Fed Chairman Ben S. Bernanke has pledged to keep the target for U.S. overnight bank lending at almost zero through at least late 2014. The central bank has also purchased $2.3 trillion of Treasury and mortgage-related debt to cap interest rates.

Bernanke is scheduled to speak at the end of this week at the Kansas City Fed’s annual economic symposium in Jackson Hole, Wyoming. The Fed’s next meeting is Sept. 12-13.

“We see an announcement of another round of asset purchases at the September meeting as more likely than not,” Zach Pandl, the Minneapolis-based senior interest-rate strategist at Columbia Management Investment Advisers LLC, wrote on the company’s website yesterday. The central bank will concentrate its purchase on mortgage bonds, according to Columbia, which oversees $331 billion.

The Fed is currently in the process of swapping shorter-term Treasuries in its holdings with those due in six to 30 years to put downward pressure on long-term borrowing costs.

The central bank is scheduled to buy as much as $5.5 billion of securities due from November 2020 to August 2022 today as part of the program, according to the Fed Bank of New York website.

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