Treasuries rose for a second day as yields at the highest level in five weeks and concern the U.S. recovery will stall boosted demand for the safest assets. U.S. bonds and the yen extended gains after Japanese Prime Minister Naoto Kan defeated a leadership challenge from party rival Ichiro Ozawa. German investor confidence fell to a 19- month low in September, a report showed today, before releases this week that economists say will show weaker U.S. industrial production and higher retail sales. “After the move that we’ve seen, it’s reasonable to expect some paring back of losses because the economic outlook remains uncertain,” said Orlando Green, assistant director of capital- markets strategy at Credit Agricole Corporate & Investment Bank in London. “We have to see what the data delivers.” The yield on the 10-year note fell 4 basis points to 2.71 percent at 6:26 a.m. in New York, according to BGCantor Market Data. The 2.625 percent security due August 2020 rose 11/32, or $3.44 per $1,000 face amount, to 99 8/32. Yields climbed as high as 2.85 percent yesterday, the most since Aug. 6. They drew enough investors to push the note to its first gain in four days. Mitsubishi UFJ, a unit of Japan’s largest publicly traded bank, was one of the buyers, said Yusuke Tanaka, the bank’s senior dealer in Singapore. “I’m still bullish on Treasuries,” he said. “The U.S. economy is still weak.” Yield Spread The difference between two- and 10-year yields narrowed to 2.18 percentage points from as much as 2.27 percentage points yesterday, also a five-week high. This so-called flattening of the Treasury yield curve has further to go and investors should favor longer maturities to profit from it, strategists at Bank of America Merrill Lynch led by Priya Misra in New York wrote in a report Sept. 10. The Federal Reserve will launch “large-scale purchases of long-dated Treasuries” in the first quarter of 2011, the report said. The central bank is buying debt as part of its plan to spur the economy by keeping borrowing costs low. The Fed snapped up $300 billion of U.S. government securities last year. It announced on Aug. 10 it would reinvest principal payments from its holdings of agency debt and agency mortgage-backed securities in longer-term Treasuries. The central bank’s next purchases will be tomorrow, targeting notes due from September 2014 to August 2016, according to its website. It plans to buy Treasuries maturing from March 2012 to February 2013 on Sept. 16. The ZEW Center for European Economic Research in Mannheim said its index of German investor and analyst expectations, which aims to predict developments six months ahead, dropped to minus 4.3 from 14 in August. That’s the fifth monthly decline and the lowest since February 2009. Economists had forecast 10, according to the median of 36 estimates in a Bloomberg survey. Jobless Rate The number of Americans claiming jobless benefits probably increased in the week through Sept. 11 to 459,000, from 451,000, according to the median estimate of 40 economists before the release, scheduled for Sept. 16. The U.S. jobless rate rose to 9.6 percent in August from 6.1 percent two years earlier. Home sales fell 26 percent in July, the biggest drop since Bloomberg started tracking the figure in 1999. A government report today will show U.S. retail sales rose in August, according to a Bloomberg News survey. Other figures this week will show industrial production cooled and inflation was contained, separate surveys show. ‘Yields Will Decline’ “Yields will decline again,” said Yamamoto, who helps oversee $102.3 billion in assets from Tokyo at Diam, the investment company part-owned by Japan’s second-biggest life insurer. “The unemployment rate is holding at a high level. Housing isn’t picking up.” The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices, was 1.85 percentage points. The figure has averaged 2.11 percentage points for the past five years. U.S. government securities advanced yesterday as the government reported a smaller monthly budget deficit and the Fed bought $3.4 billion of U.S. debt. The excess of spending over revenue totaled $90.5 billion last month, down from $103.6 billion in August 2009, the Treasury reported. The world’s largest economy will grow 2.5 percent in 2011, less than the 2.8 percent projected last month and slower than the estimated 2.7 percent expansion for this year, Bloomberg News surveys indicate. The 10-year yield will be 2.74 percent by year-end, according to a Bloomberg survey of banks and securities companies, with the most recent forecasts given the heaviest weightings. The projection was for 3.36 percent two months ago. To contact the reporters on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net

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