Treasuries advanced as stocks fell before government reports on consumer spending and orders for durable goods that are likely to add to evidence the U.S. economic slump is deepening. The difference in yield, or spread, between two- and 10- year notes stayed near the narrowest in six months as investors sought longer-dated securities to safeguard their money amid the worsening recession. The MSCI World Index of stocks fell for a fifth day, extending a slump in equities that’s erased more than $20 trillion of market value in the past six months. “Bond markets will stay very well bid into the New Year,” Adam McCormack, a fixed-income sales manager in London at Barclays Capital. “There is a lot of focus on the consumer spending data, because people are looking for sings of a more rapid slowdown or deceleration.” The yield on the 10-year note fell two basis points to 2.17 percent as of 9:06 a.m. in London, according to BGCantor Market Data. The price of the 3.75 percent security due November 2018 climbed 3/32, or 94 cents, to 114. The two-year note yield declined three basis points to 0.86 percent. Personal spending dropped 0.7 percent last month, a record fifth monthly decline, while durable-goods orders fell 3 percent, according to Bloomberg News surveys of economists. The reports are due from the Commerce Department at 8:30 a.m. in Washington today. Stocks Decline The MSCI World Index lost 0.3 percent, extending this year’s drop to 44 percent, the worst annual performance in its two-decade history. Japanese government bonds advanced as investors favored the relative safety of state debt. “The data could boost the bond market this week,” said Hidehiko Maejima, international bond strategist in Tokyo at BNP Paribas Securities Japan Ltd., a unit of France’s largest bank. Gains are likely to be modest as “money rates may accelerate declines and this will help risk appetite,” he said. The two-year yield will stay below 1 percent through the first quarter of 2009 because the Federal Reserve will avoid increasing the target rate for overnight bank loans as reports compound evidence an economic recovery won’t come any time soon, BNP’s Maejima said. The difference between two- and 10-year note yields was at 1.28 percentage points today, having yesterday narrowed to less than 1.30 percentage points for the first time since June. The gap is shrinking as investors favor longer-dated securities after the Fed’s Dec. 16 cut in the key rate to as low as zero. Bonds Versus Stocks U.S. government debt returned 14.5 percent in 2008, the most in any year since 1995, according to Merrill Lynch & Co.’s U.S. Treasury Master Index. The Standard & Poor’s 500 Index of stocks fell 41 percent, the worst year since 1931. The U.S. economy is shrinking amid the fallout from the worst housing slump in a generation. Sales of new homes fell in November to a 17-year low as credit dried up and consumer confidence sank, the Commerce Department reported yesterday. Purchases dropped 2.9 percent to an annual pace of 407,000, lower than forecast. Demand for Treasuries may be tempered as the government increases debt sales to finance bank and automaker bailouts to revive the economy. The Treasury sold $28 billion of five-year notes yesterday, bringing the amount of two- and five-year notes it auctioned this week to a record $66 billion. The bid-to-cover ratio, which gauges demand by comparing the number of bids to the amount of securities sold, was 2.06, from 2.44 at the last five-year sale. The notes yielded 1.539 percent, the least ever. At the last auction of five-year debt on Nov. 25, the Treasury sold $26 billion of notes at a yield of 2.11 percent. Higher Yields “The U.S. government has to issue a lot of bonds,” said Satoshi Okumoto, a general manager in Tokyo at Fukoku Mutual Life Insurance Co., which has $59.5 billion in assets. “The huge supply may make the yields higher next quarter.” The government’s record $38 billion sale of two-year notes on Dec. 22 drew a yield of 0.922 percent. While that was the lowest recorded since the U.S. began regular auctions of the bonds in 1975, the average forecast in a Bloomberg survey of eight firms that bid on the sale was for a yield of 0.912 percent. Investors placed orders for 2.13 times the securities offered, compared with an average of 2.25 times at the previous six auctions. The TED spread, the difference in what the government and banks pay to borrow for three months, was little changed at 146 basis points today, having dropped from a record high of 464 basis points since Oct. 10. That compares with 135 basis points on Sept. 12, the last trading day before Lehman Brothers Holdings Inc. filed for bankruptcy. The Securities Industry and Financial Markets Association recommended trading of Treasuries ends today at 2 p.m. New York time and markets shut tomorrow for the Christmas holiday.

Source