By Paul Dobson and Theresa Barraclough May 28 (Bloomberg) -- Treasuries rose, heading for their biggest monthly gain since January, as concern the European fiscal crisis will slow economic growth boosted demand for the safety of U.S. fixed-income assets. Ten-year notes snapped two days of losses before a government report that economists said will show inflation remained subdued, easing concern price increases will erode the value of the fixed payments from debt. RBC Capital Markets advised selling 10-year U.S. index-linked bonds in favor of regular Treasuries because declines in oil and gas prices will damp inflation expectations. “The big fundamental backdrop is still a post-crisis mode, and that has been a big contributor to the Treasuries rally,” said Peter Schaffrik, co-head of interest-rate strategy at Commerzbank AG in London. “Overall it is still an environment that calls for relatively low yields.” The yield on the benchmark 10-year note fell four basis points to 3.32 percent as of 7 a.m. in New York, according to BGCantor Market Data. The 3.5 percent security due May 2020 gained 11/32, or $3.44 per $1,000 face amount, to 101 15/32. The 10-year yield’s 17 basis point gain yesterday was the most since June 1. Concern that spending cuts by European governments to narrow their budget deficits may also slow global economic expansion has boosted demand for U.S. securities. Treasury Gains Treasuries have handed investors a 1.4 percent return this month, the most since a 1.58 percent gain in January, indexes compiled by Bank of America Corp.’s Merrill Lynch unit showed. Ten-year yields slid from 3.65 percent on April 30 to 3.06 percent on May 25, the lowest level since April 2009. The Federal Reserve’s preferred price measure, which is tied to spending patterns and excludes food and fuel, rose 0.1 percent in April and was up 1.1 percent from a year earlier, according to a Bloomberg survey before today’s report. The annual gain would be the slowest since September 2001. The spread between yields on 10-year notes and Treasury Inflation-Protected Securities, or TIPS, show money managers expect consumer prices to increase an average 2.08 percent annually in the next 10 years, down from 2.40 percent on April 30. The figure was as low as 1.83 percent on May 21, the least since Oct. 9. RBC said investors should bet so-called the breakeven rate will narrow to 176 basis points. ‘Taking Advantage’ “This trade is taking advantage of both any further negative news from around the world and seasonal and structural weakness in oil and gas markets,” fixed-income strategists including London-based Ian Beauchamp and Richard McGuire wrote in a report received today. Futures on the CME Group Inc. exchange show a 39 percent chance U.S. policy makers will raise their benchmark rate by at least a quarter-percentage point by the December meeting, down from 63 percent odds a month ago. Yields indicate banks have become less willing to lend as the European crisis deepened. The London interbank offered rate, or Libor, which banks pay for three-month loans in dollars, was little changed today at 0.536 percent after advancing for the previous 13 days, data from the British Bankers’ Association showed. Ten-year notes headed for the largest weekly drop since April before a government report that economists said will show consumer spending rose last month, adding to signs the recovery in the world’s largest economy is on track. Yields have added eight basis points this week. “The data have most of the time surprised to the upside, and yields have likely found their floor,” said Michael Markovic, a senior fixed-income strategist at Credit Suisse Group AG in Zurich. Consumer spending increased 0.3 percent in April, the seventh month of gains, according to a Bloomberg survey before today’s report. To contact the reporter on this story: Paul Dobson in London at pdobson2@bloomberg.net; Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net.

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