By Wes Goodman May 19 (Bloomberg) -- Treasury yields were near the lowest level in 2010 after the euro slid to a four-year low and stocks declined, boosting demand for the safest securities. U.S. bonds held yesterday’s biggest gain in a week as investors snapped up dollars after Germany said it will ban naked short sales of European government debt and 10 financial companies. Australian and Japanese bonds advanced, while the cost to protect bonds from default in Asia and the Pacific rose. “Treasuries are the name of the game,” said Satoshi Okumoto, a general manager in Tokyo at Fukoku Mutual Life Insurance Co., which has the equivalent of $60 billion in assets. “It’s all about the flight to quality.” The benchmark 10-year note yielded 3.35 percent as of 6:44 a.m. in London, according to BGCantor Market Data. The 3.5 percent security due May 2020 traded at 101 1/4. Yields fell 14 basis points yesterday. The declined to 3.26 percent on May 6, the lowest level since December. Ten-year notes climbed as much as 1/4 point earlier today as the euro slid to $1.2144, the weakest since April 2006. Government securities gave up their gains as the euro recouped losses to be little changed against the dollar. MSCI’s Asia Pacific Index of shares dropped for a fourth day, losing 1.2 percent. Europe will take “years” to restore its balance following the debt crisis, former Federal Reserve Chairman Paul Volcker, said yesterday in an interview with Tom Keene on Bloomberg Radio. Buying Treasuries “Investors will transfer money from Europe to U.S. Treasuries,” said Hiromasa Nakamura, who helps oversee the equivalent of $20.7 billion as a senior investor at Mizuho Asset Management Co. in Tokyo. “The safe haven is the U.S. dollar. There is room for Treasury yields to decline.” Mizuho Asset shifted funds to Treasuries from euro bonds at the end of April, Nakamura said. It is also planning to trim its holdings denominated in British pounds and buy bonds issued in Canadian dollars later today, he said. The German trading ban lasts until March 31, financial regulator BaFin said in an e-mailed statement yesterday. The step was needed because of “exceptional volatility” in euro- area bonds, BaFin said. “Markets went into a tailspin in reaction to the announcement,” Mitul Kotecha, head of global currency strategy in Hong Kong at Credit Agricole CIB, wrote today in a note to clients. “The action appears to have backfired, fueling uncertainty over its impact.” Australian 10-year rates fell nine basis points to 5.42 percent. Japanese benchmark yields dropped two basis points to 1.28 percent. Default Swaps The cost of insuring Asian bonds against default rose the most in almost two weeks. The Markit iTraxx Asia index of credit swaps on 50 investment-grade borrowers outside Japan climbed 10 basis points to 131.5 basis points, Royal Bank of Scotland Group Plc prices show. Credit-default swap indexes are benchmarks for protecting debt against default. An increase suggests deteriorating perceptions of creditworthiness and a drop shows improvement. The contracts pay the buyer face value in exchange for the underlying debt if a borrower fails to meet its agreements. Germany prohibited speculation on European government bonds with credit-defaults swaps as part of its trading ban. TIPS Traders cut bets on inflation before a U.S. report that economists said will show the cost of living is contained. The difference between yields on 10-year notes and Treasury Inflation Protected Securities, or TIPS, a gauge of trader expectations for consumer prices, narrowed as far as 2.13 percentage points. The figure is within three basis points of the lowest level this year. Consumer prices excluding food and energy costs rose 1 percent in April from a year earlier, according to a Bloomberg survey before the Labor Department report today. It would be the smallest increase since 1966. Retailers such as Wal-Mart Stores Inc. are cutting prices to help sales as customers face almost 10 percent unemployment. The lack of inflation, which may be trimmed further by the European debt crisis, is one reason Federal Reserve policy makers have pledged to keep their benchmark rate near zero. Yields indicate banks have become less willing to lend and investors are concerned the European rescue plan will fail to contain the crisis. The London interbank offered rate, which banks pay for three-month loans in dollars, rose to 0.465 percent yesterday, the highest level since Aug. 5, according to the British Bankers’ Association. The extra yield that Libor offers over the overnight indexed swap rate, the Libor-OIS spread, was 24 basis points today, less than half a basis point away from a nine-month high. To contact the reporters on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.

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