Treasury 10-year yields were near the lowest level in 16 months before a government report that economists said will show global purchases of U.S. financial assets increased in June. Two-year rates were three basis points away from a record low as the Federal Reserve prepared to buy Treasuries this week as part of its plan to spur the slowing economy by keeping borrowing costs low. The central bank will purchase notes due from 2014 to 2016 tomorrow and debt due in 2016 to 2020 on Aug. 19, according to the Fed Bank of New York’s website. “U.S. Treasuries have room to rally,” said Sungjin Park, who oversees the equivalent of $52.4 billion as head of fixed income in Seoul at Samsung Investment Trust Management, South Korea’s largest private investor. “It’s just the start of the economic downturn, not the end.” Benchmark 10-year notes yielded 2.67 percent as of 12:55 p.m. in Tokyo, according to BGCantor Market Data. The figure was 2.65 percent earlier, a level not seen since April 2009. The 2.625 security due in August 2020 traded at a price of 99 20/32. Two-year rates were 0.53 percent, versus the record of 0.4892 set Aug. 11. Park said he’s favoring 10- and 30-year securities because they yield more than shorter maturities. The difference between rates on Treasuries due in 2012 and 2040 is 3.32 percentage points, versus the median of 1.88 percentage points for the past five years. The MSCI Asia Pacific Index of shares slid 0.6 percent, after falling to a three-week low, helping increase demand for the relative safety of government securities. Treasury Returns Investors in a weekly survey by Ried Thunberg ICAP, a unit of ICAP Plc, the world’s largest inter-dealer broker, stuck to their bearish outlook following the market rally, the company said. Ried’s index on the outlook for Treasuries through December was unchanged at 44 for the seven days ended Aug. 13 versus the week before. A figure less than 50 shows investors expect prices to fall. Treasuries have returned 7.6 percent this year, according to indexes compiled by Bank of America Merrill Lynch, as investors sought the relative safety of debt while equities tumbled. MSCI’s World Index of shares fell 4.1 percent in 2010, including reinvested dividends. International investors bought $45.7 billion more long-term U.S. notes, bonds and stocks than they sold in June, rising from $35.4 billion in May, according to the median forecast in a Bloomberg News survey of economists before the Treasury Department report today. ‘More Modest’ Investors are moving more money than ever out of stocks and into bonds. About $185 billion was sent to bond funds through July 31, the most on record, according to the Investment Company Institute. “Investors should own less equities, more bonds, more global investments, more cash and more dry ammunition,” Mohamed A. El-Erian, chief executive officer at Pacific Investment Management Co., said in an interview that USA Today published on its website yesterday. Pimco, in Newport Beach, California, manages the world’s biggest mutual fund. “The pace of economic recovery is likely to be more modest in the near term than had been anticipated,” the Fed said Aug. 10. It announced it will invest the principal payments from its holdings of mortgage-backed securities into longer-term Treasury securities in the same statement. The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices, narrowed to 1.64 percentage points on Aug. 13, the least since September 2009. Japan GDP Japan’s economy grew at less than a fifth of the pace economists estimated last quarter, a government report showed, pushing it into third place behind the U.S. and China. The nation’s 10-year bond yield dropped 2.5 basis points to a seven-year low of 0.955 percent, according to Japan Bond Trading Co., the nation’s largest interdealer debt broker. Bond investors seeking top-rated securities face fewer alternatives to Treasuries, allowing President Barack Obama to sell unprecedented sums of debt at ever lower rates to finance a $1.47 trillion deficit. Net Issuance While net issuance of Treasuries will rise by $1.2 trillion this year, the net supply of corporate bonds, mortgage-backed securities and debt tied to consumer loans may recede by $1.3 trillion, according to Jeffrey Rosenberg, a fixed-income strategist at Bank of America in New York. The company is one of the 18 primary dealers that are required to bid at the government’s debt sales. Shrinking credit markets help explain why some Treasury yields are at record lows even after the amount of marketable government debt outstanding increased by 21 percent from a year earlier to $8.18 trillion. “The number-one fixed-income conundrum is ‘Where do I go?’” said Mitchell Stapley, the chief fixed-income officer for Fifth Third Asset Management, who oversees $22 billion in assets. In credit markets, “the supply of sleep-at-night- quality bonds has just collapsed,” he said in an interview from Grand Rapids, Michigan4QCJ5VOQJR56&peplid=6414812&pepllastname=Reynolds&peplfirstname=Nicholas&peplcompanyname=Bloomberg_News&peplcompanynumber=603470&pepltitle=No_Title_Info&interviewstatus=0&interviewdate=2010-08-16_11_07_16&interviewreporterpepl=0&intervieweditorpepl=6414812&interviewsource=News_Reporter_Software&srange=15442&erange=15459">Nicholas Reynolds, Nate Hosoda To contact the reporters on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.

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