By Susanne Walker and Matthew Brown March 22 (Bloomberg) -- Treasuries rose as European leaders disagreed on specifics and a timetable for a plan to aid Greece, stoking demand for the relative safety of U.S. government debt. Yields on two-year notes fell from their highest level since January before tomorrow’s record-tying auction of the securities as Germany’s Chancellor Angela Merkel told investors they shouldn’t expect a European Union summit to agree on assistance for Greece. The U.S. House passed the most sweeping health-care legislation in four decades. “There’s a bid in risk-free assets,” said Christian Cooper, an interest-rate strategist in New York at Royal Bank of Canada, one of 18 primary dealers that are obliged to bid at Treasury auctions. “The assumption was that there would be a rescue, but when will it come and at what costs?” The yield on the two-year note decreased 2 basis points, or 0.02 percentage point, to 0.97 percent at 10:14 a.m. in New York, according to Bloomberg data. It touched 1 percent on March 19, the highest level since Jan. 8. The 10-year note’s yield fell 3 basis points to 3.66 percent. EU leaders must not create “illusions” for markets by building expectations for aid to Greece, Merkel said in an interview with Deutschlandfunk radio that aired yesterday. Her remarks came after Greece’s Prime Minister George Papandreou and European Commission President Jose Barroso said the EU should spell out its rescue plan at a March 25-26 summit in Brussels. IMF on Debt Fixed-income gains were limited after the International Monetary Fund said advanced economies face “acute” challenges in tackling high public debt, and unwinding existing stimulus measures won’t come close to bringing deficits back to prudent levels. All Group of Seven countries except Canada and Germany will have debt-to-GDP ratios close to or exceeding 100 percent by 2014, John Lipsky, first deputy managing director of the IMF, said in a speech yesterday in Beijing. Two-year notes sold by the billionaire Warren Buffett’s Berkshire Hathaway Inc. in February yield 3.5 basis points less than Treasuries of similar maturity, according to data compiled by Bloomberg. Procter & Gamble Co., Johnson & Johnson and Lowe’s Cos. debt also traded at lower yields in recent weeks. That’s a situation Jack Malvey, a former Lehman Brothers Holdings Inc. chief fixed-income strategist, calls “exceedingly rare.” Budget Deficit The $2.59 trillion of Treasury Department sales since the start of 2009 have created a glut as the budget deficit swelled to a post-World War II-record 10 percent of the economy and raised concern on whether the U.S. deserves its AAA credit rating. The increased borrowing may also undermine the first- quarter rally in Treasuries as the economy improves. The U.S. Treasury is scheduled to sell $44 billion of two- year notes tomorrow, $42 billion of five-year debt the next day and $32 billion of seven-year securities on March 25. The amounts all match records. Indirect bidders, a group that includes foreign central banks, bought 53.6 percent of the amount sold at the $44 billion auction of two-year notes on Feb. 23, the highest level since June. Direct bidders, security firms and money managers that aren’t primary dealers, bought 8.2 percent of the notes, compared with 9.2 percent in the previous 10 sales. The two-year note sale should be the “strongest” of the three auctions, Jim Vogel, an interest-rate strategist at FTN Financial in Memphis, Tennessee, wrote in a note to clients. “Hitting the mid-50s in bidding between indirects/directs should not be a problem given the uncertainty ahead both domestically and in Europe.” Health-Care Bill U.S. lawmakers passed yesterday the most sweeping health- care legislation in four decades, which the Congressional Budget Office estimates will cost $940 billion over 10 years. The amount will be more than made up for with a tax on the highest earners, fees on health-care companies and hundreds of billions of dollars in Medicare savings, which will reduce the federal budget deficit, the CBO said. “The bill needs to be funded, which is a negative for Treasuries, but people have been expecting this for some time, so it’s not having an immediate impact on the market today,” said Kornelius Purps, a fixed-income strategist at UniCredit SpA in Munich. Treasuries have returned 1.6 percent this year, compared with 2.4 percent for German government bonds and 0.7 percent for Britain’s gilts, according to indexes compiled by Bank of America Merrill Lynch. To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net; Matthew Brown in London at mbrown42@bloomberg.net

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