By Wes Goodman June 7 (Bloomberg) -- Treasuries rose, sending yields toward a one-year low, as Europe’s widening debt crisis drove down stocks around the world, increasing demand for the safest securities. Notes advanced for a second day, extending the biggest rally in 14 months, as Europe’s credit crunch and smaller-than- expected U.S. job gains drive speculation the American economy will slow in the second half of 2010. Traders trimmed bets for the Federal Reserve to raise interest rates this year and economists reduced their yield forecasts. “Fear has taken over,” said Roger Bridges, who oversees the equivalent of $9.9 billion as head of debt at Tyndall Investment Management Ltd. in Sydney, part of Australia’s largest insurance company. “People are flying to the U.S.” The yield on the U.S. 10-year note slid four basis points to 3.17 percent as of 6:44 a.m. in London, according to data compiled by Bloomberg. The 3.5 percent security due May 2020 rose 9/32, or $2.81 per $1,000 face amount, to 102 25/32. Yields dropped 16 basis points on June 4, the most since March 18, 2009, when the Fed surprised investors with plans to purchase as much as $300 billion in government debt. The rate was as low as 3.06 percent on May 25, a level not seen since April 2009. Australian 10-year yields tumbled 13.5 basis points to 5.29 percent, the biggest decline since January. Japanese 10-year bond futures advanced to the highest level in more than two years. A basis point is 0.01 percentage point. Euro Tumble The euro dropped to its weakest level since November 2001 against the yen. A German court is considering imposing a temporary injunction to keep the country from participating in a regional rescue package totaling almost $1 trillion that officials agreed to in May, according to Der Spiegel. Investors have pushed the euro down since November as bond yields in Greece, Portugal and Spain rose along with concern about their budget deficits. The Hungarian forint tumbled to a 14-month low today. The MSCI World Index of shares fell 0.9 percent, extending a 2.8 percent tumble from June 4, when a Labor Department report showed the U.S. added fewer jobs in May than economists expected. “Businesses, especially small businesses, are very, very reluctant to hire,” Steve Forbes, chairman and chief executive officer of publisher Forbes Inc., said in an interview with Bloomberg Television today. The U.S. economy will recover to grow 4 percent this year, he said, versus a 2.4 percent contraction in 2009. Still Bearish Futures contracts on the CME Group Inc. exchange show a 32 percent chance U.S. policy makers will raise the benchmark rate by at least a quarter percentage point this year, versus 62 percent a month ago. The 10-year yield will advance to 3.93 percent by year-end, according to a Bloomberg survey of banks and securities companies, with the most recent forecasts given the heaviest weightings. The figure dropped from 4.14 percent in the first week of May. Investors in a weekly survey by Ried Thunberg ICAP, a unit of the world’s largest inter-dealer broker, stuck to their bearish outlook on Treasuries for this month and year-end. The company’s indexes for June 30 and Dec. 31 were both at 44 for the week ended June 4. A figure less than 50 shows investors expect prices to fall. The company, based in Jersey City, New Jersey, interviewed 27 fund managers controlling $1.42 trillion. Forecast Changes Wall Street’s biggest bond firms are buying the most Treasuries in two years. Goldman Sachs Group Inc., JPMorgan Chase & Co. and the rest of the 18 primary dealers of U.S. securities that trade with the Federal Reserve shifted from a $23.2 billion bet against Treasuries to holding $37.1 billion of the debt as of May 26, central bank data show. “Time for a mea culpa,” bond strategists at Barclays Plc led by Managing Director Ajay Rajadhyaksha in New York, wrote in a research report dated June 4 as the primary dealer cut its forecast for 10-year note yields to 3.85 percent from 4.3 percent. Government debt has “been helped by heightened risk aversion, driven mainly by Europe, almost since the start of the quarter,” they wrote. Investors rushed to Treasuries as the U.S. prepared to sell $70 billion of notes and bonds this week, starting with a $36 billion three-year auction tomorrow. Asian bond risk gauges rose the most in almost two weeks. The Markit iTraxx Asia credit swap index of 50 investment- grade borrowers outside Japan rose 12 basis points to 148.5 basis points, according to Deutsche Bank AG. It was the biggest jump since May 25, prices from CMA DataVision in New York show. Japan and Australia’s risk benchmarks also climbed. Credit-default swap indexes are benchmarks for protecting debt against default, and traders use them to speculate on credit quality. Swaps pay the buyer face value in exchange for the underlying securities if a borrower fails to meet its debt agreements. To contact the reporters on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.

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