Treasury 10-year note yields rose as reports showed an index of manufacturing in the Philadelphia area increased and U.S. initial jobless claims unexpectedly dropped, reducing demand for the safety of government debt. Two-year note yields were within two basis points of their all-time low as the Federal Reserve prepared to buy securities maturing from March 2012 to February 2013. China, the largest foreign investor in U.S. government debt, increased its holdings of Treasury notes and bonds in July after reducing them in June for the first time in 15 months. “The bond market is not getting the continual boost from weaker-than-expected data,” said Carl Lantz, head of interest- rate strategy in New York at Credit Suisse Group AG, one of the 18 primary dealers that trade with the Fed. “Yields went higher on the numbers from the Philly Fed.” The yield on the 10-year note increased 3 basis points, or 0.03 percentage point, to 2.75 percent at 10:14 a.m. in New York, according to BGCantor Market Data. The price of the 2.625 percent security maturing in August 2020 dropped 7/32, or $2.19 cents per $1,000 face amount, to 98 29/32. The Philadelphia Fed’s gauge of manufacturing in eastern Pennsylvania, southern New Jersey and Delaware increased this month to minus 0.7 from minus 7.7 a month earlier. Readings greater than zero signal expansion. The 10-year note yield advanced earlier as the Labor Department reported that initial jobless claims unexpectedly dropped to 450,000 in the week ended Sept. 11 from a revised 453,000 in the previous week. The median forecast of 42 economists surveyed by Bloomberg News was for an increase to 459,000 from a previously reported 451,000. Producer Prices Prices paid to factories, farmers and other producers in the U.S. climbed 0.4 percent in August after rising 0.2 percent in the previous month, the Labor Department reported. The median forecast of 76 economists in a Bloomberg News survey was for a 0.3 percent increase. Consumer prices excluding food and energy rose 1 percent in August from a year earlier, according to a Bloomberg News survey before the Labor Department’s report tomorrow. The reading was 0.9 percent in July. China raised its holdings of longer-term securities by 0.1 percent to $840.6 billion and boosted its position in short-term Treasury bills by $2.1 billion to $6.1 billion, the Treasury Department reported today. China’s Holdings The Asian nation has reduced its holdings of U.S. government securities by 10 percent since reaching a peak at $939.9 billion in July 2009. Its bill holdings have fallen 96 percent from $167.5 billion during that period, even as it increased its longer-term Treasury assets 8.8 percent from $772.4 billion. Japan, the second largest foreign holder of Treasuries, increased its position in the debt 2.2 percent to $821 billion, the most it has owned. Treasury 10-year note yields rose yesterday on speculation Japan will buy shorter-term U.S. government debt after selling the yen yesterday for the first time since 2004 to support an export-driven economic recovery. The yields dropped on Aug. 10, when the Fed said at the conclusion of its policy meeting that it would keep its bond holdings level by resuming the purchase of U.S. debt to support a recovery it described as weaker than earlier anticipated. The Fed has bought $21.533 billion of Treasuries since Aug. 17 in an effort to help keep borrowing costs low. It seeks to keep holdings in the System Open Market Account at about $2.054 trillion by using the proceeds of principal payments from its agency mortgage-backed securities and agency debt. Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., cut holdings of government- related debt for a second month in August. The $248 billion Total Return Fund reduced its investment in the debt to 36 percent of assets, the smallest amount since April, from 54 percent the previous month, according to the website of Newport Beach, California-based company. To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net; Cordell Eddings in New York at Ceddings@bloomberg.net

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