U.S. Treasury two-year notes advanced for a third day as stock declines around the world spurred demand for the relative safety of fixed-income assets and the Federal Reserve prepared to buy government debt. Notes gained after Alcoa Inc., the largest U.S. aluminum manufacturer, reported a loss yesterday that was wider than analysts forecast, stoking concern that first-quarter corporate earnings will disappoint. The Fed plans to purchase Treasuries maturing from April 2010 to February 2011 today, part of a plan to buy as much as $300 billion of debt to cut borrowing costs. “Overnight earnings have been a bit of a reality check about the degree of optimism we’ve had over the last few weeks,” said Sean Maloney, a fixed-income strategist in London at Nomura International Plc. “You need a little bit more than just the promises from policy makers to extend the recent equity rally, and that can only come with better numbers coming from the corporate sector.” The yield on the 10-year note fell two basis points to 2.88 percent as of 7:50 a.m. in New York, according to BGCantor Market Data. The 2.75 percent security due February 2019 rose 4/32, or $1.25 per $1,000 face amount, to 98 28/32. A basis point is 0.01 percentage point. Investors should buy 10-year notes if the yield rises above 3 percent and sell if it falls to 2.5 percent, Maloney said. The MSCI World Index of global shares slid 0.5 percent, its third day of losses, while the Dow Jones Stoxx 600 Index of European shares fell for a fourth straight day. ‘Grim’ Data U.S. economic data remains “grim,” though the first “green shoots” of a recovery have appeared, Fed Bank of Dallas President Richard Fisher said in a speech in Tokyo. Inflation probably won’t present a serious threat, he said. The dollar and the yen advanced as investors sought the currencies as a refuge. The dollar strengthened to $1.3230 per euro, from $1.3272 yesterday. The spread between rates on 10-year notes and Treasury Inflation Protected Securities, the so-called break-even rate that reflects the outlook for consumer prices, widened to 1.35 percentage points from 0.84 percentage point a months ago. Consumer prices were probably unchanged in the 12 months ended March 31, based on a Bloomberg News survey of economists, meaning bond investors aren’t losing anything to inflation. The Labor Department is scheduled to report the figure on April 15. Record Auction The government is scheduled to sell a record $35 billion of three-year notes today. Three-year yields declined four basis points to 1.26 percent. The securities yielded 1.489 percent at the previous auction on March 10. Investors bid for 2.26 times the amount of notes on offer at the sale, compared with an average for the past 10 auctions of 2.44. “Given the way most of the auctions in the U.S. have gone so far we don’t see any problems there,” said Christoph Rieger, a fixed-income strategist in Frankfurt at Dresdner Kleinwort. “The bottom line for us is that there is no alternative right now to lower yields. Once we test the upper end of the range, we feel quite convinced that these are buying levels.” Treasuries handed investors a 1 percent loss this month, according to Merrill Lynch & Co.’s U.S. Treasury Master index. They fell 1.4 percent in the first quarter, the worst start to a year since 1999 as President Barack Obama’s government oversaw an increase in U.S. marketable debt to $6.27 trillion, the most ever. Obama is asking Congress to pass a budget that will result in a $1.75 trillion deficit as he seeks to revive the economy. ‘Not Interested’ The U.S. is scheduled to auction $18 billion of 10-year notes tomorrow. “I’m not interested in the U.S. market,” said Jaemin Cheong, a bond trader in Seoul at Industrial Bank of Korea, the nation’s largest lender to small- and mid-sized companies. “The amount of issuance will be more and more. The economy in the U.S. will rebound around the end of the year.” Ten-year yields will climb to 4 percent by year-end, he said. A Bloomberg survey of economists projects the figure will be 2.91 percent, with the most recent forecasts given the heaviest weightings. The Fed has more than doubled the size of its balance sheet to $2.08 trillion in the past year by buying financial assets. The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, narrowed to 96 basis points from 2008’s high of 4.64 percentage points in October. The figure was about 33 basis points two years ago. Yet to Recover Thirty-year mortgage rates fell to 4.78 percent last week, according to Freddie Mac, the lowest since the McLean, Virginia- based mortgage finance company started keeping records 37 years ago. Rates are about 1.89 percentage points more than 10-year U.S. yields, widening from 1.42 percentage points two years ago. Treasury 10-year notes rose yesterday as U.S. stocks fell. Standard & Poor’s 500 Index dropped 2.4 percent. Profits of companies in the S&P 500 probably fell 37 percent in the first quarter, the seventh straight decline, according to estimates from more than 1,700 securities analysts compiled by Bloomberg. Ten-year yields moved in the same direction as the S&P 500 77 percent of the time in the past year, according to Bloomberg calculations.

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