By Anchalee Worrachate and Theresa Barraclough April 9 (Bloomberg) -- Treasuries headed for their best week since February on rising speculation policy makers will keep interest rates near zero and after an auction of 10-year notes this week drew the strongest demand in at least 16 years. Ten-year yields were near the lowest level in a week as concern that Greece won’t meet its debt obligations spurred demand for the safest assets. Investors raised bets the Federal Reserve will hold its key rate unchanged through August after Chairman Ben S. Bernanke said joblessness, foreclosures and weak lending are dragging on the recovery. “Comments from the Fed and Bernanke suggested policy makers are not in a hurry to raise interest rates,” said Nicholas Stamenkovic, a fixed-income strategist at RIA Capital Markets Ltd. in Edinburgh. “Another boost for Treasuries this week is the fact that supply was well-absorbed. The market took it down without any difficulty.” The 10-year note yield fell 1 basis point to 3.88 percent as of 6 a.m. in New York, according to BGCantor Market Data. The 3.625 percent security climbed 2/32, or 63 cents per $1,000 face amount, to 97 28/32. The yield is down 6 basis points this week. Two-year securities yielded 1.07 percent, having fallen 3 basis points since April 2. Greek bonds slumped this week on renewed concern about the country’s ability to cut the European Union’s largest budget deficit. Credit-default swaps linked to Greek bonds climbed 53 basis points to a record 468.5 yesterday, according to CMA DataVision prices. Bonds trimmed losses yesterday after European Central Bank President Jean-Claude Trichet said a debt default “was not an issue” for the nation. ‘High Borrowing Costs’ “The Greek problem is not over, especially as they may need to fund at very high interest rates, which means that the financing costs will also be high,” said Hiromasa Nakamura, a senior investor in Tokyo at Mizuho Asset Management Co., part of Japan’s second-largest listed bank. “Investors may want to hold safer goods and Treasury yield level are very attractive.” Futures on the Chicago Board of Trade show 68 percent odds U.S. policy makers will keep the benchmark rate unchanged through August, up from a 58 percent chance a month ago. “We are far from being out of the woods,” Bernanke said on April 7 in Dallas. While the financial crisis has abated and economic growth will probably reduce unemployment over the next year, the U.S. faces hurdles including the lack of a sustained rebound in housing, a “troubled” commercial real-estate market and “very weak” hiring, he said. Treasuries have returned 0.9 percent this year, trailing a 2.9 percent return on German bunds, according to Bank of America Merrill Lynch indexes. Debt Sales Gains in Treasuries this week were tempered as the U.S. sold $82 billion in notes and bonds in four auctions. The sales consisted of $8 billion in Treasury Inflation Protected Securities on April 5, a record-tying $40 billion of three-year notes the next day, $21 billion of 10-year notes April 7 and $13 billion of 30-year bonds yesterday. President Barack Obama and Congress have increased U.S. marketable debt to a record $7.41 trillion to fund spending programs. At the same time, reports indicated the economic recovery may be gaining traction, spurring investors toward assets tied to growth. The Treasury 10-year sale drew bids 3.72 times the amount offered, the strongest demand since at least 1994. Widening Difference The widening difference between the Fed’s benchmark rate and the 10-year yield is a buy signal, according to Fukoku Mutual Life Insurance Co. The spread widened to 3.74 percentage points on April 5, the most since 2004. Fukoku added to its holdings of 10-year notes this week, said Satoshi Okumoto, who helps oversee the equivalent of $58.4 billion as a general manager at the life insurance company. The yield climbed to 4.0095 percent on April 5, the highest level since Oct. 16, 2008. “Four percent is quite an attractive level,” said Okumoto. “We don’t expect a very strong recovery. Housing and employment are the weak spots.” Mortgage investors won’t start hedging their holdings with Treasury sales until the Fed begins to raise interest rates, and that is months away, Okumoto said. To contact the reporters on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net; Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net

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