Treasury two-year note yields were close to a record low as evidence global economic growth is slowing sustained the refuge appeal of government debt. U.S. 10-year notes dropped after last week’s fourth straight five-day advance as European stock markets climbed for the first time in four days. Treasuries have returned 8 percent in 2010 after losing 3.7 percent last year, according to Bank of America Merrill Lynch indexes. “There’s deepening concern in the market about risks of a double-dip scenario, and that might push Treasury yields lower in the near term,” said Christoph Rieger, co-head of fixed- income strategy at Commerzbank AG in Frankfurt. “The pessimism might be a bit overdone, and the risk premium seen in the yield curve is excessive.” The two-year note yield was unchanged at 0.50 percent at 8:03 a.m. in New York, according to BGCantor Market Data. It reached a record low 0.4547 percent on Aug. 20. The price of the 0.625 percent security maturing in July 2012 was unchanged at 100 1/4. Ten-year note yields gained 2 basis points to 2.63 percent after touching 2.53 percent on Aug. 20, the lowest level since March 2009. Futures on the Standard & Poor’s 500 Index increased 0.5 percent, while the Stoxx Europe 600 Index gained 0.8 percent. Purchases of existing U.S. homes fell 13.4 percent in July after declining 5.1 percent in the previous month, according to the median forecast of 55 economists in a Bloomberg News survey before a report tomorrow from the National Association of Realtors. Government Auctions The U.S. prepared to sell $102 billion of two-, five- and seven-year notes this week in the smallest monthly offering of that combination of debt since May 2009. The government is auctioning $7 billion of 30-year Treasury Inflation Protected Securities, or TIPS, today. The Federal Reserve will purchase about $18 billion of U.S. debt by the middle of September using the money from principal payments on its holdings of agency debt and agency mortgage- backed securities, according to its website. The central bank plans to buy notes due from 2013 to 2014 on Aug. 24 and debt maturing from 2021 to 2040 on Aug. 26. European Central Bank council member Axel Weber said last week the central bank may need to keep emergency measures in place through year-end. “The green light remains for the underlying bid despite the extreme run,” John Spinello, chief technical strategist in New York at Jefferies Group Inc., wrote in a note to clients. Morgan Stanley View Morgan Stanley, the most bearish of the 18 primary dealers that trade with the Fed, said its forecast that Treasury yields would rise this year was misguided. “We got our rates call wrong and missed a great opportunity to be long bonds this year,” James Caron, head of U.S. interest-rate strategy at Morgan Stanley in New York, wrote in a note to clients last week. “The market is currently rife with tactical relative value opportunities and that’s what we will focus on going forward.” Morgan Stanley had forecast that a strengthening U.S. economy would lead to private credit demand, higher stock prices and diminish the refuge appeal of Treasuries, pushing yields higher. In December, the firm said that that yields on benchmark 10-year notes would climb about 40 percent to 5.5 percent, the biggest annual increase since 1999. The economy has never contracted with the difference between short- and long-term Treasury yields as wide as it is now. That gap, at 2.11 percentage points for 2- and 10-year notes last week, signals a 15.5 percent chance of a recession in the next year, according to the Cleveland Fed. To contact the reporters on this story: Anchalee Worrachate in London at aworrachate@bloomberg.net; Yasuhiko Seki in Tokyo at yseki5@bloomberg.net

Source