Treasury two-year yields reached a record low before a government report that economists said will show orders to U.S. factories fell, adding to speculation the Federal Reserve will increase asset purchases. Ten-year notes rose on speculation manufacturing, which led the U.S. out of its worst recession since the 1930s last year, is slowing. The Federal Reserve is scheduled to buy Treasuries tomorrow and the next day as part of its plan to keep borrowing costs low, as policy members debate whether to increase their bond buying, a plan known as quantitative easing. “These QE expectations are making it very difficult to sell Treasuries with much conviction,” said Peter Chatwell, a fixed-income strategist at Credit Agricole Corporate & Investment Bank. “That’s what’s keeping prices elevated.” The two-year yield fell to a record 0.3987 percent, according to Bloomberg generic data. Ten-year yields declined three basis points to 2.48 percent as of 8:18 a.m. in London, according to BGCantor Market Data. The 2.625 percent security due in August 2020 gained 9/32, or $2.81 per $1,000 face amount, to 101 9/32. Orders placed with U.S. factories declined 0.4 percent in August, the third loss in four months, according to the median estimate of economists ahead of today’s Commerce Department data. An industry report last week showed manufacturing expanded in September at the slowest pace since November. Separate figures today will show pending home sales rose in August, the Bloomberg surveys show. Fed Purchases The Fed is scheduled to buy Treasuries due from September 2016 to August 2020 tomorrow. It plans to purchase securities maturing from March 2013 to August 2014 on Oct. 6, according to its website. Speculation the central bank will decide to purchase additional bonds as a way to pump money into the economy has been rising since Fed Chairman Ben S. Bernanke and policy makers said Aug. 10 they would reinvest proceeds from maturing mortgage holdings into government debt. Since then, reports have shown the economic recovery may be faltering. The Labor Department will likely say on Oct. 8 that the unemployment rate rose to 9.7 percent in September from 9.6 percent in August, according to the Bloomberg surveys. Japan’s five-year yields sank to 0.24 percent, the least since June 2003, on speculation the Bank of Japan will also take steps to keep borrowing costs low at a two-day meeting that ends tomorrow. Asian Stocks The MSCI Asia Pacific Index of shares rose 0.3 percent, after gaining by as much as 0.9 percent earlier today. A growing number of U.S. government securities dealers, strategists and economists say additional bond purchases may have the unintended consequences of pushing rates higher. Yields on 10-year Treasury notes, a benchmark for everything from home mortgages to corporate bonds, rose last month for the first time since March even as the Fed hinted that it may conduct more quantitative easing to bolster the economy. Inflation Bonds Based on what happened when the Fed began purchasing $1.725 trillion of government debt and mortgage securities in 2009, lower yields are not a foregone conclusion. Treasuries lost 3.72 percent last year as a drop in bond prices drove the yield on the 10-year note to 3.84 percent from 2.22 percent. “Quantitative easing is priced into the picture,” said Sean Simko, who oversees $8 billion at SEI Investments Co. in Oaks, Pennsylvania. “When the market does turn, as we’ve seen in the past, it will turn sharply and very swiftly.” Yields indicate inflation expectations have risen over the past month. The difference between rates on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices, widened to 1.83 percentage points from 1.67 on Sept. 3. The figure is still less than the five-year average of 2.10 percentage point. “I’m bullish on Treasuries, corporate bonds and emerging- market government bonds,” said Zeal Yin, who invests in dollar- denominated debt in Taipei at Shin Kong Life Insurance Co., Taiwan’s second-largest life insurer with the equivalent of $47.6 billion in assets. “The economic data is very weak. They will do more quantitative easing.” Shin Kong’s Yin is among those predicting lower borrowing costs. Additional quantitative easing would send 10-year yields down by half a percentage point, he said. QE Effects So-called QE would probably push 10-year yields down 20 basis points to 30 basis points, Tom Lam, the Singapore-based chief economist at OSK-DMG, said in a report today. The company is a joint venture between Malaysian securities firm OSK Holdings Bhd. and Frankfurt-based Deutsche Bank AG. Investors in a survey by Ried Thunberg ICAP Inc., a unit of the world’s largest inter-dealer broker, became less bearish on the outlook for Treasuries through the end of June. Ried’s sentiment index rose to 43 for the seven days ended Oct. 1 from 42 in the week before. A figure less than 50 indicates that investors expect prices to fall. To contact the reporters on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net; Paul Dobson in London at pdobson2@bloomberg.net. To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net.

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