Treasuries advanced after North and South Korea exchanged artillery fire, increasing demand for the safety of government debt. The gains pushed the 10-year yield to the lowest level in more than a week as North Korea fired shells near the nations’ border, injuring 14 soldiers and prompting the South’s military to deploy jets and return fire. The Federal Reserve will buy inflation-indexed debt as part of its plan to pump money into the economy. The government plans to sell $35 billion of five- year debt, part of $99 billion of note sales this week. “Tensions in the Korea peninsula are adding to risk aversion,” said Mohit Kumar, a fixed-income strategist at Deutsche Bank AG in London. Treasuries “could have a more bullish bias in the short term,” Kumar said. The yield on the benchmark 10-year note fell four basis points, or 0.04 percentage point, to 2.76 percent at 7:24 a.m. in New York, according to BGCantor Market Data. The price of the 2.625 percent security maturing in November 2020 rose 11/32, or $3.44 per $1,000 face amount, to 98 25/32. Yields have decreased 10 basis points in the past two days. Two-year note yields fell one basis point to 0.48 percent, or 0.23 percentage point more than the upper end of the Fed’s target range for its benchmark rate. The spread was 0.29 percentage point on Nov. 15, the highest in two months. The 10-year Treasury yield may drop to as low as 2.50 percent next month and early 2011, Kumar said. A Bloomberg News survey of banks and securities companies with the most recent forecasts given the heaviest weightings projects the 10-year note yield will decrease to 2.63 by Dec. 31. Recovery Outlook Traders are betting that Treasuries will be supported as the global economic recovery shows signs of faltering and Europe’s sovereign-debt crisis boosts demand for the safest assets. Treasuries have returned 7.8 percent this year, compared with 2.8 percent for debt of the 16-nation euro region, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. North Korea fired shells at a South Korean island, according to reports from the government and the television channel YTN. Television footage showed smoke billowing from Yeonpyeong Island off South Korea’s northwest coast, where the shelling set fire to houses, YTN said. South Korea’s Joint Chiefs of Staff said in a statement on its website that North Korea fired “several” shells. U.S. Housing Existing-home sales in the U.S. fell 1.1 percent last month, according to the median forecast of 71 economists in a Bloomberg News survey. The report from the National Association of Realtors is due at 10 a.m. New York time. “Yields are too high,” said Sungjin Park, who oversees the equivalent of $55 billion as head of fixed income in Seoul at Samsung Investment Trust Management Co., South Korea’s largest private bond investor. “We will see a very sluggish U.S. recovery.” Park said he’s favoring two- and three-year notes, those that most closely track the Fed’s target for overnight loans between banks because of their short maturities. The Fed in its Nov. 3 statement that it will add $600 billion to the economy through June by buying Treasury securities as it tries to spur growth and inflation. Today’s Treasury Inflation Protected Securities purchases will total $1 billion to $2 billion, according to the Fed’s website. Also today, the central bank is scheduled to issue the minutes of its last policy meeting. Treasury Bears Treasury bears say gains in U.S. debt will be limited as the economic expansion continues and the Fed fuels inflation. Five quarters of economic growth will push 10-year yields up to 3 percent by year-end, said Peter Jolly, the Sydney-based head of market research for the investment-banking unit of National Australia Bank Ltd., the nation’s largest lender. “The U.S. economy continues to eke out gains,” Jolly said. “This will keep Treasury yields from going back” to lower levels, he said. A Commerce Department report today will show the economy expanded at a 2.4 percent rate in the July to September period, faster than the 2 percent pace the government estimated last month, a Bloomberg survey of economists showed. The difference between yields on 10-year notes and those on TIPS, a gauge of trader expectations for consumer prices over the life of the securities, has widened to 2.14 percentage points from this year’s low of 1.47 percentage points in August. The five-year notes being sold today yielded 1.438 percent in pre-auction trading, compared with 1.33 percent at the prior sale on Oct. 27. Investors bid for 2.82 times the amount offered last month, versus the average of 2.78 for the past 10 auctions. Indirect bidders, the category of investors that includes foreign central banks, bought 39.5 percent of the notes, compared with the 10-sale average of 44.5 percent. A $35 billion two-year sale yesterday drew bids for 3.70 times the available debt, compared with 3.43 in October. The Treasury will conclude this week’s note auctions with a sale of $29 billion of seven-year debt tomorrow. To contact the reporters on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

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