Treasury 30-year yields fell to the lowest in a week as some investors swapped shorter maturities with rates near record lows for longer ones as policy makers suggested another round of asset purchases may not be needed. Thirty-year bonds yielded 2.79 percentage points more than five-year notes, narrowing from 2.83 percentage points on Oct. 18. That record yield gap was driven by speculation the Fed will buy more bonds, focusing on shorter maturities, to support the economy. Fed Bank of Richmond President Jeffrey Lacker said a new round of so-called quantitative easing “would be a hard case to make.” His colleague Charles Plosser said he is “less concerned about deflation risks” than some policy makers. “What Lacker and Plosser said has perhaps helped to cool speculation the Fed might go for another round of quantitative easing as early as next month,” said Nicholas Stamenkovic, a fixed-income strategist at RIA Capital Markets Ltd. “The market is searching for direction. I think the Fed will go ahead with another QE in November, but this just gives some investors an excuse to unwind their recent positions.” The 30-year bond yield fell two basis points to 3.87 percent as of 8:05 a.m. in London, according to BGCantor Market Data, the lowest since Oct. 14. The 3.875 percent security maturing in August 2040 traded at 100 1/32. Five-year notes yielded 1.10 percent, versus the all-time low of 1.0686 percent set Oct. 8. Investors have earned 2.6 percent on two-year notes, 11 percent from five-year debt and 17 percent in 30-year bonds this year, according to Bank of America Merrill Lynch indexes. Longer maturities also outperformed shorter ones as the government prepared to sell two-, five- and seven-year notes and five-year Treasury Inflation Protected Securities next week. Debt Sales The U.S. will announce today the sales will total $106 billion, according to Wrightson ICAP LLC, the economic advisory company in Jersey City, New Jersey, that specializes in government finance. President Barack Obama has increased U.S. publicly traded debt to a record $8.5 trillion as he tries to sustain the economic expansion. Fed officials are mulling whether to increase Treasury purchases at their next meeting Nov. 2-3 to spur economic growth and keep prices in the economy from falling. Chairman Ben S. Bernanke said on Oct. 15 there appears to be a “case for further action.” The next round of large-scale purchases will have a more limited effect than its predecessor in bolstering the economy, said Alan Blinder, former vice chairman of the Fed. While more so-called quantitative easing is almost certain to begin after the Fed’s November meeting, the stimulus will be less powerful because credit spreads have shrunk and Wall Street traders already project $1 trillion in purchases, the Princeton University economist said yesterday in a speech. Corporate Bonds An index of U.S. corporate bonds yields 2.76 percentage points more than Treasuries, narrowing from this year’s high of 3.25 percentage points in June. The TED spread, the difference between what banks and the U.S. government pay to borrow for three months, shrank to 15 basis points from this year’s high of 49 basis points in June. Fed Bank of Richmond President Jeffrey Lacker said yesterday a new round of asset purchases “would be a hard case to make” with economic growth in line with his outlook. Charles Plosser, president of the Fed Bank of Philadelphia, said he’s not as likely as some fellow central bankers to favor a policy aimed at lifting the inflation rate. The near-record difference between short- and long-term yields shows some investors are concerned that Fed efforts to spur prices in the economy will eat into Treasury returns, said Satoshi Okumoto, who helps manage the equivalent of $67.7 billion as a general manager at Fukoku Mutual Life Insurance Co. in Tokyo. ‘We’re Avoiding’ “We’re avoiding 30-year bonds,” he said. The widening spread “suggests people are concerned about future inflation.” Thirty-year yields will advance to 4.39 percent by the end of next year, according to a Bloomberg survey of banks and securities companies with the most recent forecasts given the heaviest weightings. The spread between rates on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices, widened to 2.06 percentage points from this year’s low of 1.47 percentage points in August. The current figure matches the 10-year average. Stocks offer more protection against inflation than bonds, according to Lisa Emsbo-Mattingly, director of asset allocation research at Fidelity Investments, a Boston-based money manager that oversees $1.52 trillion. Equities are “an attractive alternative to the fixed income market with more upside potential,” Emsbo-Mattingly wrote in a report yesterday. “Economic growth is clearly a picture of sluggishness, but the thing to keep in mind is that the economy won’t likely stay that way.” Thirty-year bonds rose for a third day yesterday as a Fed regional survey showing a “modest pace” in the economic recovery failed to quell speculation that policy makers will increase asset purchases to spur inflation and employment. An index of U.S. leading indicators probably climbed in September for the third-straight month, signaling the recovery will extend into 2011, economists said before the report today. To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net. To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net.

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