By Yasuhiko Seki and Wes Goodman April 22 (Bloomberg) -- The Treasury 10-year yield was near the lowest level in four weeks as concern that Greece will need to tap emergency loans to avoid default boosted demand for the relative safety of U.S. government debt. The difference between 2- and 10-year yields was close to a one-month low after Greece’s 10-year bonds slid for a seventh day, pushing yields on the securities to more than 5 percentage points above German bunds for the first time. U.S. notes rose yesterday on speculation the Treasury will start to cut the sizes of its auctions after next week’s sales. “Concerns over sovereign problems in countries like Greece may discourage risk sentiment and curtail capital inflows into riskier assets,” said Koichi Kurose, chief strategist in Tokyo at Resona Bank Ltd., a unit of Japan’s fourth-largest banking group. “The debt securities of developed nations may draw buying interest.” The yield on the 10-year note rose one basis point to 3.74 percent at 6:44 a.m. in London, according to BGCantor Market Data. The 3.625 percent security due February 2020 fell 2/32, or 63 cents per $1,000 face amount, to 99 1/32. The yield earlier dropped to 3.73 percent, the lowest since March 24. The spread between yields on 2- and 10-year debt shrank to 2.72 percentage points yesterday, also the lowest since March 24, before trading at 2.75 percentage points today. The so-called yield curve widened to a record 2.94 points Feb. 18. Greece Concerns The extra yield investors demand to hold Greek 10-year bonds instead of German bunds climbed to a record 522 basis points yesterday. The spread widened as the debt-laden country started talks on an assistance package including 30 billion euros ($40.2 billion) from the European Union and as much as 15 billion euros from the International Monetary Fund. Finance Minister George Papaconstantinou said Greece may activate an emergency aid package led by the EU before the talks on the loan conditions end in two weeks. “I’m not saying that the government will ask for it,” Papaconstantinou said in Athens after the first session of talks with officials from the euro region, the IMF and ECB. “There is still a safety bid from Greece giving Treasuries a boost due to continued uncertainty and the selloff in Greek debt,” said Suvrat Prakash, an interest-rate strategist in New York at BNP Paribas, one of the 18 primary dealers obliged to bid at government debt sales. The Treasury will next week sell an unprecedented $128 billion of two-, five- and seven-year notes and inflation- indexed securities maturing in five years, according to the average estimate of nine primary dealers in a Bloomberg survey. Debt Issuance The supply of Treasuries may fall by $52 billion for the rest of fiscal 2010 and drop by $589 billion in fiscal 2011, James Caron, head of U.S. interest-rate strategy at primary dealer Morgan Stanley in New York, wrote in a note to clients. President Barack Obama has boosted marketable U.S. debt to a record $7.76 trillion, Treasury figures show. Obama’s proposed budget calls for a $1.6 trillion budget deficit in 2010, compared with last year’s record $1.4 trillion gap. Demand for Treasuries was tempered before reports that economists said will confirm a recovery in the world’s largest economy, led by consumer and business demand. Bookings for goods meant to last several years rose for a fourth month, according to a Bloomberg survey before the Commerce Department report tomorrow. Reports today and tomorrow will show existing-home sales and new-home sales gained in March, other surveys forecast. Higher Yields “Yields are going to rise,” said Hideo Shimomura, who helps oversee the equivalent of $53.8 billion in Tokyo as chief fund investor at Mitsubishi UFJ Asset Management Co., a unit of Japan’s biggest publicly traded bank. “Consumer demand and demand from businesses are going to pick up.” Shimomura said he may trim his bond holdings now 10-year yields have fallen a quarter of a percentage point from this month’s high of 4.01 percent set on April 5. That level was the most since October 2008. Futures on the CME Group Inc. exchange show a 66 percent chance the Federal Reserve will raise its target rate for overnight bank lending by at least a quarter-percentage point by its December meeting, down from 78 percent odds a month ago. The Fed has kept the rate in a range of zero to 0.25 percent since December 2008. The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices, stood at 2.35 percentage points today, compared to this year’s high of 2.49 points in January. To contact the reporter on this story: Yasuhiko Seki in Tokyo at yseki5@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net.

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