Treasury 10-year yields were near the lowest in a month on speculation the Federal Reserve will keep interest rates near zero through next year after policy makers said European indebtedness may harm U.S. growth. Two-year yields were close to the lowest this year after Fed said in its policy statement yesterday that “financial conditions have become less supportive” of growth and a report showed new home sales slumped. Durable goods orders fell for the first time in six months, economists said before a report today, adding to signs the world’s largest economy is losing momentum. Japan’s bond yields dropped to a seven-year low on signs of a global slowdown. “There is now a strong belief that the Fed will keep interest rates on hold for the foreseeable future,” said Kazuaki Oh’e, executive director of fixed income, currencies and distribution in Tokyo at Canadian Imperial Bank of Commerce, the nation’s fifth-largest lender. “A favorable policy outlook and emerging signs of soft patch in economic data may help 10-year yields test the three percent mark.” The benchmark 10-year note yielded 3.12 percent as of 6:40 a.m. in London, according to BGCantor Market Data. The 3.5 percent security due May 2020 held at 103 6/32. The yield fell to 3.09 percent yesterday, the lowest since May 25. The two-year yield was little changed at 0.68 percent, after dropping to 0.66 percent yesterday, the least since Dec. 2. Policy makers kept their target rate for overnight lending between banks in a range of zero to 0.25 percent, where it has been since December 2008. The decision was forecast by all of the 98 economists surveyed by Bloomberg News. ‘Improving Gradually’ “The economic recovery is proceeding” and “the labor market is improving gradually,” the Federal Open Market Committee said in its statement. Central bankers cited slowing inflation and said the recovery is “proceeding,” altering April language that the economy has “continued to strengthen.” Orders for durable goods fell 1.4 percent in May, after increasing 2.8 percent the previous month, according to a Bloomberg survey before today’s Commerce Department report. New home sales slumped 32.7 percent in May after a tax credit expired, the Commerce Department said yesterday. “That was one ugly home sales release,” said Guy Lebas, chief fixed-income strategist and economist at Janney Montgomery Scott LLC in Philadelphia. “It’s one more check mark in the negative box.” Futures on the CME Group Inc. exchange show an 11 percent chance policy makers will increase the Fed funds target by at least a quarter-percentage point by the December 2010 meeting, down from 36 percent odds a month earlier. Asian Stocks Demand for Treasuries was tempered as most Asian stocks rose, damping demand for the safety of government debt. “While there has been the plethora of negative news about the economy recently, the global economy won’t fall into a recession even if it were to lose some momentum,” said Masaru Hamasaki, chief strategist in Tokyo at Toyota Asset Management Co., which oversees the equivalent of $15 billion. “It is difficult to justify perpetual declines in bond yields and share pieces.” BHP Billiton Ltd., the world’s largest mining company, gained as much as 2.2 percent in Sydney after new Australian Prime Minister Julia Gillard undertook to negotiate with mining companies on a proposed profit tax after ousting Kevin Rudd as national leader through a party-room challenge. Gillard said today she was “throwing open the government’s door” to negotiate with the mining industry. Rio Tinto Group, BHP Billiton and Xstrata Plc have led a campaign since last month against the proposed 40 percent tax. The MSCI Asia Pacific Index advanced 0.3 percent, snapping a two-day decline. Debt Sale The U.S. is scheduled to sell $30 billion of seven-year debt today, the third of three note auctions this week totaling $108 billion. The Treasury sold five-year notes yesterday at a yield of 1.995 percent, compared with the average forecast of 1.961 percent in a Bloomberg survey. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, fell to 2.58 from 2.71 at the May 26 auction. “It was surprising,” said Christopher Bury, co-head of fixed-income rates in New York at Jefferies Group Inc., one of the 18 primary dealers obligated to participate in government auctions. “We’re still at an all-time low in yields, and it sounds like there were a few key investors who stayed away. The market immediately got repriced.” A sale of $40 billion in two-year notes on June 22 produced a record low yield of 0.738 percent. Japan’s bonds rose for a third day on speculation Europe’s fiscal problems will spread to the U.S. and boost demand for safer assets. The yield on the benchmark 10-year bond dropped two basis points to 1.145 percent, after falling to 1.14 percent, the lowest level since August 2003. To contact the reporters on this story: Yasuhiko Seki in Tokyo at yseki5@bloomberg.net.

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