By Theresa Barraclough March 19 (Bloomberg) -- Treasuries headed for a weekly gain as speculation that Greece will fail to secure financial aid from the European Union increased demand for the safety of government debt. Benchmark 10-year notes snapped two weeks of losses after Greek Prime Minister George Papandreou set a one-week deadline for the EU to compile a rescue package before the country goes to the International Monetary Fund. The difference between 2- and 10-year yields was near the lowest since January after a government report yesterday showed consumer prices stopped rising last month. “There’s some discussion going on about the Greek issue, which is circulating uncertainty in markets,” said Akira Takei, a manager in the international bond-investment department in Tokyo at Mizuho Asset Management Co., a unit of Japan’s second- largest bank. “We have to wait and see how well the Greek government will tackle this problem, but for the time being uncertainty will persist and people will flock to Treasuries.” The yield on the 10-year note fell one basis point to 3.67 percent as of 2:08 p.m. in Tokyo, according to BGCantor Market Data. The 3.625 percent security due February 2020 rose 1/32, or 31 cents per $1,000 face amount, to 99 5/8. The yield has declined three basis points this week, and may drop to as low as 3 percent by the end of June, Mizuho’s Takei said. The spread between 2- and 10-year yields, charted on the yield curve, was at 2.72 percentage points, after shrinking to 2.70 percentage points yesterday, the least since Jan. 4. ‘Far From Resolved’ Papandreou said yesterday he may turn to the IMF to overcome Greece’s debt crisis unless European leaders agree to set up a lending facility at a March 25-26 summit. The IMF option has already been dismissed by European Central Bank President Jean-Claude Trichet and French President Nicolas Sarkozy, who said it would show the EU can’t solve its own crises. German Chancellor Angela Merkel said this week the IMF may be the only answer. “The Greek story is far from resolved,” Geoffrey Yu, a strategist at UBS AG in London, wrote in a note to clients. It will “continue to haunt the euro” and other risky assets. U.S. consumer prices were unchanged in February after rising 0.2 percent the previous month, the Labor Department said yesterday. That was the first time prices had failed to increase since March 2009. Slower inflation helps preserve the purchasing power of debt’s fixed payments. ‘Remain Contained’ “We expect inflation to remain contained for the rest of this year given the slack in the economy and the headwinds to growth,” Curtis Arledge, chief investment officer of fixed income at New York-based BlackRock Inc., wrote in a note to clients. “We are more constructive on intermediate- to longer- dated Treasuries.” The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of expectations for inflation known as the breakeven rate, was at 2.24 percentage points today, down from this year’s high of 2.49 percentage points reached Jan. 11. Demand for Treasuries was tempered as the U.S. prepared to sell a record amount of two-, five, and seven-year notes next week. The government will offer $44 billion of 2012 debt on March 23, $42 billion in five-year notes the following day and $32 billion of 2017 securities on March 25, the Treasury announced yesterday. President Barack Obama has increased U.S. marketable debt to an unprecedented $7.41 trillion to fund a budget deficit the government predicts will swell to a record $1.6 trillion in the fiscal year ending Sept. 30. China Holdings China, the largest holder of U.S. debt, said its foreign- exchange reserves are facing the “triple whammy” of a decline in the dollar’s purchasing power, falling Treasury prices and possible inflation in the long run, Yu Yongding, a former adviser to the nation’s central bank, wrote in a commentary published today in the China Daily newspaper. China was a net seller of U.S. government debt in January for the third month, the longest such stretch since the end of 2007, a U.S. Treasury report showed March 16. Capital losses on China’s foreign-exchange reserves, as measured by the Dollar Index, are “inevitable,” Yu wrote. China will only be able to recover its losses if the Federal Reserve implements an exit strategy from monetary expansion, Yu wrote. Such an exit is “doubtful,” he wrote. To contact the reporter on this story: Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net.

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