By Wes Goodman May 6 (Bloomberg) -- Treasuries fell, trimming their biggest two-day gain since August, on speculation U.S. reports today and tomorrow will show the labor market is improving. Ten-year yields climbed from their lowest level in 2010 as economists said the figures will show initial jobless claims declined last week and jobs increased in April by the most in three years. Long-term Treasuries held their place as the world’s best performing bonds over the past month after the debt crisis in Europe increased demand for U.S. government securities and the dollar earlier this week. “Yields aren’t attractive to many investors at these levels,” said Kazuaki Oh’e, a debt salesman in Tokyo at Canadian Imperial Bank of Commerce, the nation’s fifth-largest lender. “The U.S. economy is rebounding.” The benchmark 10-year rate rose two basis points to 3.56 percent as of 6:38 a.m. in London, according to BGCantor Market Data. The 3.625 percent security due February 2020 fell 6/32, or $1.88 per $1,000 face amount, to 100 1/2. Jobless claims declined to 440,000 last week, the least since Feb. 5, according to a Bloomberg News survey before the Labor Department reports the figure. The U.S. added 190,000 jobs in April, a separate survey showed as the Labor Department prepared to issue the number tomorrow. Ten-year yields slid to 3.49 percent yesterday, the lowest since Dec. 18. They dropped 14 basis points over the past two days, the biggest back-to-back decline since Aug. 14. The extra yield that 10-year Treasuries offer over similar- maturity Japanese bonds narrowed to 2.26 percentage points yesterday, the least in almost three months. Greek Crisis Investors snapped up Treasuries yesterday as the Greek debt crisis spread and stocks had a “horrible” performance, Adam Carr, senior economist in Sydney at ICAP Australia Ltd., wrote to clients. The rally helped Treasuries maturing in 10 years and longer return 5.9 percent in the past month, the most of 144 bond indexes compiled by the Paris-based European Federation of Financial Analysts’ Societies, after accounting for changes in bond prices and currencies. “There’s a lot of room for the market to go further,” said Satoshi Okumoto, who helps oversee the equivalent of $58.6 billion as a general manager at Fukoku Mutual Life Insurance Co. in Tokyo. “U.S. government bonds are the most liquid and the safest assets.” Okumoto said he’d consider selling if U.S. 10- year yields fall to 3 percent. Contagion Effects Greece’s widening deficit threatens “grave contagion effects” in the euro area, said Bundesbank President Axel Weber, a member of the European Central Bank council, as riots in Athens left three people dead. Moody’s Investors Service said it may cut Portugal’s debt rating as the country struggles to reduce its budget deficit. The MSCI World Index of shares fell for a third day today, erasing gains from earlier in the year. Europe’s currency tumbled to $1.2789, the weakest since March 2009. “Flight to safety is the name of the game,” Mitul Kotecha, the Hong Kong-based head of global currency strategy at Credit Agricole CIB, part of France’s largest bank, wrote in a note to clients today. “It is admittedly difficult to see what will reverse this trend and more pain and contagion is expected.” Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, cut his year-end forecast for 10-year yields to 3.97 percent on May 4 from 4.32 percent on April 21, according to data compiled by Bloomberg. Slow Inflation Traders reduced bets on inflation. The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices, narrowed to 2.23 percentage points yesterday, the least since April 5. Treasuries also rose yesterday after the U.S. said it will auction $78 billion in notes and bonds next week, the first reduction in sales of coupon-bearing securities since May 2007. “The Treasury Department has evidently decided that the fiscal outlook has improved sufficiently to begin reducing the issuance of nominal coupon securities,” economists at Goldman Sachs Group Inc. including Ed McKelvey wrote to clients. President Barack Obama has increased the marketable U.S. debt to a record $7.76 trillion as he borrows to sustain the economic revival, raising speculation investors will demand higher yields to buy the debt. Treasury bulls are in the minority. The 10-year yield will advance to 4.11 percent by year-end, according to a Bloomberg survey of banks and securities companies, with the most recent forecasts given the heaviest weightings. “The job market is improving,” Joseph LaVorgna and Carl J. Riccadonna, economists at Deutsche Bank Securities Inc. in New York, wrote in a report yesterday. Ten-year yields will rise to 4.5 percent by Dec. 31, they. The company is one of the 18 primary dealers required to bid at government debt sales. To contact the reporters on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.

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