Treasuries rose for a second day after Moody’s Investors Service said France’s Aaa credit rating is under pressure because of liabilities stemming from Europe’s sovereign debt crisis. Benchmark 10-year note yields fell to the lowest level in a week as the Moody’s statement yesterday encouraged demand for the safest assets. Yields also dropped as a report showed China’s economy grew at the slowest pace in two years. Prices paid to U.S. producers rose last month after no change in August, a Labor Department report is forecast to show. “Following the news with respect to the Moody’s report on France, we are seeing Treasuries being supported,” said Niels From, chief analyst at Nordea Bank AB in Copenhagen. “The drawback could be inflation.” Yields on 10-year notes fell five basis points, or 0.05 percentage point, to 2.11 percent at 7:24 a.m. in New York, according to Bloomberg Bond Trader prices. The 2.125 percent securities due in August 2021 advanced 13/32, or $4.06 per $1,000 face amount, to 100 1/8. Yields touched 2.10 percent, the lowest level since Oct. 11. France’s financial strength has weakened because of the global financial and economic crisis and the potential for additional liabilities stemming from Europe’s sovereign debt turmoil, Moody’s said yesterday in its statement. It will monitor and assess its “stable” outlook on the nation’s debt over the next three months, the New York ratings company said. German Bunds German 10-year bund yields dropped seven basis points to 2.02 percent, while yields on similar-maturity French debt increased five basis points to 3.10 percent. The difference in yields, or spread, between 10-year Treasuries and the French debt securities widened eight basis points to 99 basis points, the most on a closing basis since March 2009. Europe’s crisis may sustain demand for the relative safety of U.S. securities, said Michael Turner, a fixed-income and currency strategist at Royal Bank of Canada in Sydney. “There’s a fair bit of caution out there among investors,” he said. “In that environment, Treasuries should remain reasonably well supported.” U.S. bond yields are still lower than they were on Aug. 5, when Standard & Poor’s lowered the nation’s credit rating to AA+ from AAA because the securities have retained their allure as a haven in times of economic stress. A “fair value” model for Treasuries indicates the deepening crisis in Europe may have cut yields on 10-year notes by 50 basis points, Dominic Konstam, the global head of rates research at Deutsche Bank AG in New York, wrote in a report dated yesterday. Drop in Stocks The Stoxx Europe 600 Index of equities fell 0.8 percent today, and futures on the Standard & Poor’s 500 Index expiring in December slipped 0.2 percent. China’s economy grew 9.1 percent in the third quarter from a year earlier, the slowest pace since 2009 and less than the median forecast of 9.3 percent in a Bloomberg News survey of 22 economists. U.S. producer prices increased 0.2 percent in September after no change in the previous month, according to the median forecast in a Bloomberg News survey before today’s Labor Department report. Consumer prices rose 3.9 percent from a year earlier compared with a 3.8 percent increase in August, according to the median forecast before tomorrow’s report from the government. Real Yield U.S. 10-year notes yield negative 1.66 percentage points after accounting for inflation. The so-called real yield was negative 2.05 percentage points on Sept. 22. Investors should favor short-term Treasury Inflation Protected Securities, according to Michael Pond, a bond strategist at Barclays Plc in New York. “Inflation is coming in well above what the market’s priced for,” Pond said yesterday on Bloomberg Television’s “Surveillance Midday” with Tom Keene. The difference between yields on two-year notes and TIPS, a gauge of trader expectations for consumer prices over the life of the debt, has fallen to 1.30 percentage points from this year’s high of 2.70 percentage points in April. TIPS have returned 0.1 percent this month, compared with a 0.8 percent loss for conventional Treasuries, according to Bank of America Merrill Lynch data. The Federal Reserve is due to buy $2.25 billion to $2.75 billion of Treasuries maturing from February 2036 to August 2041 today to keep borrowing costs low. The central bank said on Sept. 21 that it would purchase $400 billion of U.S. debt with maturities of six to 30 years through June while selling an equal amount of securities due in three years or less. Richmond Fed President Jeffrey Lacker said the Fed risks stoking costs in the economy by trying to boost growth. “History has repeatedly demonstrated that if a central bank attempts to add monetary stimulus to offset non-monetary disturbances to growth, the result is higher inflation,” he said yesterday in the text of a speech in Salisbury, Maryland. To contact the reporter on this story: 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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