By Susanne Walker and Cordell Eddings April 13 (Bloomberg) -- Treasury 10-year yields traded near the lowest levels since March amid speculation the decline that last week pushed the note to 4 percent for the first time since June was unsustainable with inflation expectations subdued. The difference between two- and 10-year yields narrowed to 2.77 percentage points from a record 2.94 percentage points in February as investors sought longer maturities. Confidence among U.S. small businesses fell in March, according to a National Federation of Independent Business report. “Speculators had been selling in anticipation of rates going higher,” said Thomas L. di Galoma, head of U.S. rates trading at Guggenheim Partners LLC, a New York-based brokerage for institutional investors. “There’s a perception that the inflation data will be friendly and that’s pushing investors back into the Treasury market.” The 10-year note yield fell one basis point to 3.84 percent at 11:11 a.m. in New York, according to BGCantor Market Data. It earlier touched 3.80 percent, the lowest since March 24. The 3.625 percent security due in February 2020 rose 3/32, or 94 cents per $1,000 face value, to 98 10/32. “There is a thicket of resistance around 3.73 percent on the 10-year yield,” said William O’Donnell, U.S. government bond strategist at RBS Securities Inc. in Stamford, Connecticut. “Ten-year Treasuries should trade within 3.7 to four percent for the next month or longer.” Consumer Prices The trade deficit in the U.S. widened in February more than anticipated as imports climbed. The gap increased 7.4 percent to 39.7 billion from a revised $37 billion the prior month, the Commerce Department said. Imports climbed 1.7 percent as Americans bought more computers and televisions made abroad, while exports rose to the highest level since October 2008. The Labor Department will say tomorrow that consumer prices excluding food and energy rose 1.2 percent in March from a year earlier, the smallest annual increase since February 2004, according to the median estimate of 37 economists in a Bloomberg News survey. The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices, narrowed to 233 basis points from this year’s high of 249 basis points set in January. The five-year average is 215 basis points. A slowdown in growth is adding to deflation pressures, Mihir Worah, who runs the $18 billion Pacific Investment Management Co., Real Return Fund, wrote in a report. “There is a near-term risk of flipping to deflation given our view that developed economies have not fully healed and consumers are not yet ready to stand on their own two feet,” Worah wrote on Pimco’s Web site. ‘Subdued Economy’ Confidence among U.S. small businesses fell in March to the lowest level since July 2009 as executives grew more concerned about earnings and sales, a private survey found. The NFIB’s optimism index dropped to 86.8 last month from 88 in February, the Washington-based group said today. Seven of the index’s 10 components declined last month and two were unchanged from February. “A subdued economy going forward will keep pricing pressure low,” said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut. “The market is taking a little direction from the negativity from the lower- than-expected NFIB print. The lack of spending and hiring is expected to keep unemployment high.” Inflation hurts Treasuries because it erodes the value of their fixed payments. Pimco is the largest investor in U.S. Treasury Inflation Protected Securities among investors that make regulatory filings, based on data compiled by Bloomberg. The 10-year yield reached its highest level since October 2008 earlier this month, climbing to 4.01 percent on April 5, amid speculation the economic recovery would force policy makers to raise interest rates. To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net; Cordell Eddings in New York at ceddings@bloomberg.net.

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