By Keith Jenkins and Wes Goodman April 16 (Bloomberg) -- Treasuries rose, headed for a second week of gains, as stocks fell after China moved to cool its property market and traders raised bets the Federal Reserve will keep interest rates at a record low through year-end. The gains drove the yield on the 10-year note to within a basis point of the lowest since March 24 as stocks dropped. San Francisco Fed President Janet Yellen said yesterday inflation is “subdued,” adding to speculation policy makers will avoid rate increases this year. “There’s a slightly weaker tone to equity markets, which is giving a bit of a prop to bonds,” said Marc Ostwald, a fixed-income strategist at Monument Securities Ltd. in London. “On the rates side of the equation, there’s little sign that the Fed is in any hurry to move at all.” The 10-year note yield decreased 2 basis points, or 0.02 percentage point, to 3.82 percent at 7:13 a.m. in New York, according to BGCantor Market Data. The price of the 3.625 percent security due in February 2020 rose 5/32, or $1.56 per $1,000 face amount, to 98 14/32. The yield has fallen 13 basis points in the past two weeks. The 10-year note’s real yield, or what investors get after accounting for inflation, was 1.3 percent today, compared with 1.12 percent at the end of 2009. While U.S. consumer prices rose 0.1 percent in March, prices excluding food and energy were unexpectedly unchanged, the Labor Department reported two days ago. Breakeven Rate The difference between yields on 10-year notes and Treasury Inflation Protected Securities, or TIPS, a gauge of trader expectations for consumer prices, narrowed to 2.36 percentage points today, from this year’s high of 2.49 in January. The five-year average is 2.15 percentage points. “We remain bullish on Treasuries and favor expressing this in the front end,” analysts at BNP Paribas SA wrote in a report dated yesterday. “The downside surprise in core CPI this week, along with stable inflation expectations and relatively contained TIPS breakevens, all should lead the market to expect the Fed to remain on the sidelines for the foreseeable future.” Policy makers have kept the target interest rate for overnight loans in a range of zero to 0.25 percent since December 2008. Last month Fed officials repeated a pledge to keep rates low for an “extended period,” citing employers’ reluctance to add jobs and depressed home building. Futures on the CME Group Inc. exchange show 67 percent odds U.S. policy makers will raise the target lending rate for overnight loans between banks by at least a quarter-percentage point by December, down from a 70 percent chance a month ago. ‘Below Its Potential’ “The economy is operating well below its potential, inflation is subdued, and such conditions are likely to continue for a while,” Yellen, who is President Barack Obama’s choice to be the central bank’s next vice chairman, said in San Francisco. “Yellen’s comments very much reinforced market expectations that interest rates will stay low,” Ostwald said. Standard & Poor’s 500 Index futures expiring in June dropped 0.1 percent after Google Inc., the owner of the world’s most popular search engine, reported first-quarter profit that fell short of some analysts’ estimates. China’s government said today it will raise minimum mortgage rates and down payment ratios for buyers of more than one home in an effort to cool economic growth. The yield on the 10-year note has fallen 7 basis points this week, partly on concern Greece will need to tap a European Union-led bailout package if it’s to avoid a default. The yield rose above 4 percent on April 5 for the first time since June. ‘Relative Attractive’ “The current Treasury yield is relatively attractive,” said Hiromasa Nakamura, a senior investor in Tokyo at Mizuho Asset Management Co., which has the equivalent of $20.4 billion in assets. “Deflation pressures are increasing. The economy is still running below its potential.” Ten-year yields will drop to 3 percent by year-end, according to Nakamura, whose company is part of Mizuho Financial Group Inc., the second-largest publicly traded bank in Japan after Mitsubishi UFJ Financial Group Inc. The yield will end the year at 4.13 percent, according to the average of analysts’ forecasts compiled by Bloomberg, with the most recent forecasts given the heaviest weighting. Housing starts climbed to a 610,000 annual rate in March from 575,000 a month earlier, according to the median forecast of 74 economists in a Bloomberg News survey. The report from the Commerce Department is due at 8:30 a.m. New York time. The Reuters/University of Michigan preliminary consumer sentiment index may have risen to the highest level since January 2008, according to the median estimate of 68 economists in a separate Bloomberg survey. That report is due at 9:55 a.m. To contact the reporters on this story: Keith Jenkins in London at Kjenkins3@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net

Source