By Susanne Walker Aug. 3 (Bloomberg) -- The extra yield investors demand to hold 10-year notes instead of two-year debt narrowed to the least since November as economists forecast the economy added fewer-than-average jobs last month, reigniting concern the economy is slowing. Treasury 30-year bonds rallied for a fifth straight day, the longest stretch of gains since May 5, as service industries expanded in July at the slowest pace since February 2010. U.S. debt rose yesterday as President Barack Obama signed a bill to raise the U.S. debt limit by at least $2.1 trillion, averting by hours a first-ever U.S. financial default, amid signs of a slowing economy and continued debt problems in Europe. “The fears of the economy sliding into a double dip are greater than they were a week ago,” said Thomas Roth, senior trader in New York at Mitsubishi UFJ Securities USA Inc. “Sentiment is so poor. It’s hard to get the market to go anywhere but higher in this environment. Dips are well supported.” The yield on the 10-year note fell three basis points to 2.58 percent at 10:23 a.m. in New York, according to Bloomberg Bond Traders prices. The price of the 3.125 percent note maturing in May 2021 rose 9/32, or $2.81 per $1,000 of face value, to 104 22/32. The yield earlier touched 2.57 percent, the lowest since November. The 30-year bond yield fell six basis points to 3.85 percent, the least since October 2010. The yield on 10-year bonds fell to within 2.25 percentage points of two-year securities, the narrowest since November. U.S. Debt Sales The U.S. will sell $32 billion of three-year notes, $24 billion of 10-year debt and $16 billion of 30-year bonds on three consecutive days beginning Aug. 9, the Treasury announced today. The amounts are the same as the grouping of auctions of these maturities sold in May. The Institute for Supply Management’s index of non- manufacturing businesses, which covers about 90 percent of the economy, dropped to 52.7 from 53.3 in June. Readings above 50 signal expansion, and economists projected 53.5 for July, according to the median forecast in a Bloomberg News survey. Companies in the U.S. added 114,000 workers to payrolls in July, according to figures from ADP Employer Services. The median forecast of economists surveyed by Bloomberg News called for an advance of 100,000. The forecast was based on a survey of 39 economists. Projections ranged from 20,000 to 150,000. A Labor Department report on Aug. 5 is forecast to show the U.S. added 85,000 jobs, according to 82 economists in a separate survey, compared with 18,000 the previous month. That compares with an average monthly increase of 126,000 from January through June. Jobs Report The unemployment rate remained steady at 9.2 percent from the previous month, economists said before the Labor Department reports the figure on Aug. 5. Consumer purchases decreased 0.2 percent in June, after a 0.1 percent gain in the prior month, Commerce Department figures showed yesterday in Washington. The median estimate of 77 economists surveyed by Bloomberg News called for a 0.1 percent increase. “The debt deal gave a free pass for guys not to have to worry about certain funds not being able to buy U.S. Treasury debt,” said Michael Franzese, managing director and head of Treasury trading at Wunderlich Securities Inc. in New York. “It allowed money to come off the sidelines and jump into Treasuries to protect their capital. It’s going into back-end Treasuries because they are going for yield grab.” The risk of a U.S. sovereign default remains “extremely low,” Fitch Ratings said yesterday. Still, the U.S. needs to confront “tough” choices on tax and spending against a weak economic backdrop if the budget deficit is to be cut to safer levels over the medium term, Fitch said. Credit Review Fitch said it expects to conclude its scheduled review of the U.S. sovereign rating by the end of August. “People are unsettled,” said Mohamed El-Erian, chief executive officer of Pacific Investment Management Co., in an interview on Bloomberg Television. “They are not used to seeing a threat to the triple-A.” Rates on the $90 billion in six-month bills due tomorrow dropped today to 0.01 percent. The rate rose to 0.3 percent on July 29, the highest since they were issued in February, on concern Congress wouldn’t raise the debt limit by the deadline yesterday. Spanish and Italian bonds rose for the first time in six days after the Swiss central bank cut interest rates, stoking speculation euro-area policy makers may also take action to ease stresses in financial markets. The Italian 10-year bond yield dropped three basis points to 6.10 percent today in London. The yield on 10-year Spanish bonds also fell to 6.25 percent. Prime Minister Silvio Berlusconi, facing record bond yields and calls for his resignation, will today give a national televised address and also inform the Senate of his plan to boost growth and tame the euro region’s second-biggest debt. “Spain and Italy will be a big problem because those markets are obviously much bigger,” Roth of Mitsubishi UFJ Securities said. --Editors: Paul Cox, Dennis Fitzgerald To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net; To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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