By Wes Goodman June 11 (Bloomberg) -- Treasuries rose, trimming a weekly decline, before a government report that economists said will show sales at U.S. retailers increased in May at the slowest pace this year. The longest maturities led the advance as comments from billionaire George Soros damped optimism the global economy will withstand Europe’s debt crisis. Concern European credit woes will spread sent the region’s currency to a four-year low against the dollar on June 7, fueling demand for the relative safety of U.S. debt. “I don’t think the flight to quality is over,” said Hiromasa Nakamura, a senior investor in Tokyo at Mizuho Asset Management Co., which has the equivalent of $20.7 billion in assets. “Employment is not good. That will be a drag on consumer spending.” The 10-year note yield fell two basis points to 3.30 percent as of 6:23 a.m. in London, according to data compiled by Bloomberg. The 3.5 percent security due May 2020 rose 5/32, or $1.56 per $1,000 face amount, to 101 5/8. The rate will drop to 2.8 percent by year-end, Nakamura said. Mizuho sold euro-denominated bonds and bought Treasuries in April, he said. Retail sales climbed 0.2 percent last month following a 0.4 percent gain in April, according to the median estimate of economists surveyed by Bloomberg News. Discounter Target Corp. is among merchants reporting gains in May sales as Americans hunted for bargains. A Labor Department report June 4 showed the U.S. added fewer jobs last month than economists expected. ‘Far From Over’ Soros said the fiscal woes that prompted Europe’s governments to curb budget deficits may push the global economy back into a recession. “The collapse of the financial system as we know it is real, and the crisis is far from over,” he said yesterday at a conference in Vienna. “We have just entered Act II of the drama.” Treasuries still headed for a weekly loss, with yields up 10 basis points, the most since the start of April. A basis point is 0.01 percentage point. Notes fluctuated between gains and losses as investors gauged the impact of Europe’s credit crunch on the global economy. Australian Jobs, N.Z. Rates They tumbled yesterday after Australia reported a third month of job gains, New Zealand raised interest rates and China said exports jumped 49 percent in May from a year earlier. Thirty-year bonds led the market’s biggest decline in two weeks as the U.S. sold $13 billion of the securities, capping three days of auctions totaling $70 billion. President Barack Obama has increased the U.S. marketable debt to a record $7.96 trillion. “I tend to think Treasury yields will move up,” said Rob da Silva, who helps oversee $222 billion globally as Sydney- based managing director of fixed income for Asia and the Pacific at Principal Global Investors, part of Principal Financial Group Inc. in Des Moines, Iowa. “The outlook over the next six months is going to favor corporate bonds over government bonds.” Ten-year yields will climb to 3.75 percent by Dec. 31, da Silva said. A Bloomberg survey of banks and securities companies projects 3.85 percent, with the most recent forecasts given the heaviest weightings. Interbank borrowing costs indicate stress in the financial system caused by the European debt crisis rose in April and May before leveling out this month. The London interbank offered rate, which banks pay for three-month dollar loans, was 0.536 percent yesterday, versus 0.538 a week earlier. The rate has risen from 0.252 percent at the end of February. ‘Safe’ Assets A combination of demand for safety and low inflation have helped Treasuries outperform higher-yielding assets. U.S. government securities returned 1.1 percent in the past month, versus a 1 percent loss for U.S. company bonds, according to Bank of America Merrill Lynch indexes. The MSCI World Index of shares fell almost 6 percent during the period. Investment in U.S. bond funds rose to a 14-week high in the seven days ended June 9, according to EPFR Global, which tracks asset allocation globally and is based in Cambridge, Massachusetts. “Fund groups associated with assets classes viewed as ‘safe’ fared well,” the company reported. The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices, was 2.02 percentage points. It has risen from 1.83 percentage points on May 21, the least since October. The five-year average is 2.14 percentage points. The U.S. economy is poised to slow in the second half of 2010, keeping inflation “extremely low,” economists at Goldman Sachs Group Inc. including Ed McKelvey in New York wrote in a note to clients yesterday. The company is one of the 18 primary dealers that are required to bid at the government debt sales. To contact the reporters on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.

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