Treasuries were little changed, after benchmark 10-year notes had their biggest gain in almost two weeks, on speculation a Labor Department report will show the U.S. lost more than half a million jobs last month. Notes have trimmed losses from the start of 2009 as investors sought the relative safety of government debt on concern the U.S. recession is worsening. Retailers including Wal- Mart Stores Inc. and Macy’s Inc. cut earnings forecasts while Alcoa Inc., the world’s largest aluminum maker, is reducing staff. “The economic fundamentals remain weak,” said Shinji Kunibe, a Tokyo-based senior money manager at JPMorgan Asset Management Japan Ltd., which oversees $847 billion globally and is part of the third-biggest U.S. bank. “We are bullish on the long end.” Kunibe said he plans to add to his holdings of 10- and 30-year Treasuries in 2009. The 10-year note yielded 2.44 percent as of 2:17 p.m. in Tokyo, according to BGCantor Market Data. The 3.75 percent security maturing in November 2018 traded at a price of 111 13/32. Two-year notes yielded 0.83 percent. Ten-year notes yield 1.61 percentage points more than two- year securities. Demand for the extra interest offered by longer maturities narrowed the spread from 1.72 percentage points at the start of the week. Investor appetite for safety spread to bills, keeping the three-month rate below 0.1 percent for three days. The yield was 7 basis points, falling from 1.79 percent six months ago. Bills are seen as among the safest securities because of their short maturities. Treasury Losses MSCI’s Asia Pacific Index of regional shares was little changed, fluctuating between gains and losses this week. The dollar headed for a weekly loss against the yen before today’s Labor Department report. The U.S. currency fell to 91.22 yen from 91.83 at the end of last week. The projected 525,000 in job losses, based on the median estimate of 73 economists surveyed by Bloomberg News, would bring last year’s payroll drop to 2.4 million. The unemployment rate jumped to 7 percent, the most since 1993, the survey showed. Treasuries are down 1.1 percent so far in 2009, according to Merrill Lynch & Co.’s U.S. Treasury Master index, on concern U.S. borrowing will rise to record levels as the government tries to spur the economy. ‘Still too Low’ Ten-year notes headed for a third weekly decline, the longest run of losses since September. The yield has risen about 40 basis points from the record low of 2.04 percent in December. “It’ll be difficult to have successful auctions,” said Yasutoshi Nagai, chief economist at Daiwa Securities SMBC Co. in Tokyo, part of Japan’s second-largest brokerage. “This yield level is still too low.” President-elect Barack Obama said on Jan. 6 he expects to inherit a $1 trillion budget deficit. The shortfall was a record $455 billion in fiscal 2008, which ended Sept. 30. Demand at a record $30 billion three-year note sale this week was less than usual. Investors bid for 2.21 times the amount of debt on offer, compared with an average of 2.41 at the past 10 auctions. A Treasury auction of inflation-indexed notes attracted the most demand in nine years, suggesting investors are concerned that inflation will quicken along with government spending. Inflation erodes the value of interest payments on fixed-income instruments. TIPS Spread The difference between rates on 10-year Treasury Inflation Protected Securities, or TIPS, and conventional notes, which reflects the outlook among traders for consumer prices, rose to 56 basis points from negative 8 basis points in November. The spread averaged 1.84 percentage points for the past year. U.S. borrowing is rising just as speculation grows that China, the biggest overseas holder of the nation’s debt, will curb its purchases should falling exports trim its foreign- exchange reserves. Exports probably dropped 5.3 percent in December, the most in almost a decade, according to a Bloomberg survey before the report due as early as today. China, with the world’s largest currency reserves at $1.9 trillion, holds $652.9 billion of the U.S.’s $5.8 trillion marketable debt. Obama, in a speech yesterday in Fairfax, Virginia, urged quick passage of a $775 billion stimulus plan and said the U.S. risks sinking deeper into an economic crisis. Investors should consider buying municipal bonds, inflation- protected Treasury notes and certain investment-grade corporate debt to take advantage of the government plans to spur the economy, according to Bill Gross, manager of the world’s biggest fixed-income fund. Pimco, Money Market Gross, co-chief investment officer of Newport Beach, California-based Pacific Investment Management Co., said the firm has also favored agency mortgage securities, bank preferred stocks, senior bank debt and top-rated asset-backed securities, in a commentary posted yesterday on the firm’s Web site. Yields suggest banks are becoming more willing to lend. The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, narrowed to 1.27 percentage points, near the lowest in four months. Goldman Sachs Group Inc., one of the 17 primary dealers required to bid in Treasury auctions, said the U.S. Treasury market hasn’t turned into an asset bubble even as investors debate the wisdom of buying with yields near record lows. “There is still a lot of demand for Treasuries,” Suvrat Prakash, an interest-rate strategist in New York at BNP Paribas Securities Corp., said yesterday. “The long end leads in a rally, so if you are looking for a bullish move the 10-year is more preferable than the two-year.” BNP is another primary dealer.

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