July 13 (Bloomberg) -- Treasuries rose, boosting long-term securities for the first time in five days, after Pacific Investment Management Co. and Federal Reserve Governor Elizabeth Duke said the U.S. inflation rate is likely to remain low. Inflation won’t be a problem in the U.S., the U.K., Europe or Japan, keeping central banks in those countries from raising interest rates, said David Fisher, head of global product management at Pimco, which runs the world’s biggest bond fund. The MSCI World index of shares fell for a second day after China’s government said it will “strictly” enforce housing policies to prevent speculative investment. The U.S. will sell $21 billion of 10-year notes today, the second of three auctions this week totaling $69 billion. “In the U.S. context, inflation is not a problem and it’s not going to be a problem,” said Marc Ostwald, a fixed-income strategist at Monument Securities Ltd. in London. “Near-term direction for Treasuries will be driven by shifts in risk sentiment and movement in equity markets. The upside for Treasuries may be limited ahead of today’s 10-year auction.” The yield on the 10-year note fell three basis points to 3.04 percent as of 7:53 a.m. in London, according to data compiled by Bloomberg. The 3.5 percent security due in May 2020 rose 7/32, or $2.19 per $1,000 face amount, to 103 29/32. Yields declined to 2.88 percent on July 1, the lowest since April 2009. “The near-term risk is actually toward disinflation rather than inflation in most of these countries,” Pimco’s Fisher said on a conference call from Tokyo, referring to the U.S., U.K., Europe and Japan. “Because interest rates are likely to remain low from central banks, we think that bonds can provide relatively attractive returns despite the very low starting level of yields.” Pimco shifted money to Treasuries from euro-denominated bonds over the past few months, Fisher said, as European governments struggled to rein in spending. Investors should avoid the debt of Greece, Portugal, Spain and Italy, he said. “We are seeing moderate growth,” Fed Governor Duke said in an interview yesterday. “We are seeing subdued inflation.” Consumer Prices The U.S. consumer-price index fell 0.1 percent in June, a third monthly decline, according to a Bloomberg survey before the Labor Department reports the figure on July 16. Excluding food and energy, core consumer prices rose 0.9 percent from a year earlier, matching the smallest annual gain since 1966, a separate Bloomberg survey showed. Slowing inflation helps preserve the value of a bond’s fixed payments. The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices, narrowed to 1.82 percentage points from this year’s high of 2.49 percentage points in January. Traders trimmed bets the Fed will raise its benchmark interest rate, which has been at a record low range of zero to 0.25 percent since 2008, by its December meeting, according to futures on the CME Group Inc. exchange. The chance fell to 14 percent yesterday, from 27 percent a month ago. No Double Dip U.S. economic growth will cut demand for Treasuries later in 2010, said Kei Katayama, who helps oversee the equivalent of $51.3 billion in Tokyo as leader of the foreign fixed-income group in Tokyo at Daiwa SB Investments Ltd., part of Japan’s second-largest brokerage. “The current yield is a little bit too low,” he said. “The economy is growing slowly, but there won’t be a double-dip recession.” Katayama holds fewer Treasuries than the percentage in the index he uses to gauge performance, he said. The 10-year yield will climb to 3.36 percent by year-end, according to a Bloomberg survey of banks and securities companies’ projections, with the most recent forecasts given the heaviest weightings. The U.S. economy will expand 3.3 percent this year and 2.9 percent in 2011, following a 2.4 percent contraction in 2009, according to International Monetary Fund estimates made July 7. Junk Bonds The highest-rated junk bonds are attracting BlackRock Inc. and other investors, helping the securities lead gains in high- yield corporate debt in a reversal from last year. Bonds in the BB range, the top three levels of speculative grade, have beaten the lowest-ranked groups by 1.78 percentage points since the start of the second quarter, according to Bank of America Merrill Lynch data. “They offer attractive yield premium,” said Curtis Arledge, chief investment officer of fixed income at New York- based BlackRock, the world’s largest money manager. “Soggy sideways is my outlook for the economy.” The 10-year securities scheduled for sale today yielded 3.07 percent in pre-auction trading, compared with 3.242 percent at the previous sale of the notes on June 9. Investors bid for 3.24 times the amount of debt on offer last month. The average at the prior 10 auctions including June is 3.03. Indirect bidders, the group that includes foreign central banks, bought 40.2 percent of the debt, versus the 10- sale average of 40.74 percent. Ten-year notes, among the most sensitive to inflation, are outperforming shorter-maturity debt as consumer prices fall. The securities have returned 8.6 percent this year, versus 5.5 percent for the broader market, the Bank of America indexes show. The U.S. yesterday sold $35 billion of three-year notes at a record low yield of 1.055 percent. The Treasury will conclude this week’s sales with a $13 billion 30-year auction tomorrow. President Barack Obama has increased the U.S. marketable debt to a record $7.96 trillion as he tries to sustain the expansion. --With assistance from John Detrixhe in New York. Editors: Nicholas Reynolds, Keith Campbell To contact the reporters on this story: Keith Jenkins in London at kjenkins3@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net. To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

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