Treasuries fell on concern record-low yields will curb demand when investors bid at a sale of 10-year inflation-protected notes today and three auctions of coupon- bearing debt next week. The Treasury Inflation Protected Securities yielded negative 0.357 percent, versus negative 0.089 percent for the March 22 sale, which was the lowest-ever auction rate. Yields on seven-year notes, scheduled for sale May 24, slid to a record 1.1679 percent yesterday. Bond rates plunged this month on concern Greece will abandon the euro bloc, driving demand for the relative safety of U.S. debt. “The market has gone a long way,� said Ali Jalai, who trades Treasuries in Singapore at Scotiabank, a unit of Bank of Nova Scotia (BNS), one of the 21 primary dealers that are required to bid at U.S. debt auctions. “It could pause here. This Greek situation will probably continue for another month. Bonds will stay at very expensive levels as long as these conditions persist.� Ten-year yields climbed three basis points, or 0.03 percentage point, to 1.80 percent as of 7 a.m. in London, according to Bloomberg Bond Trader data. The price of the 1.75 percent security due in May 2022 fell 9/32, or $2.81 per $1,000 face amount, to 99 5/8. The difference between two- and 10-year yields was 1.50 percentage points, after narrowing to 1.47 percentage points yesterday, the least since January 2009. Japan’s 10-year yield increased 2 1/2 basis points to 0.845 percent. The rate was 0.82 percent yesterday, the least in 19 months and matching the lowest since 2003. The MSCI Asia Pacific Index (MXAP) of stocks rose 1 percent, snapping a six-day rout and helping curb demand for debt. Today’s TIPS auction will total $13 billion, and the government is scheduled to announce the size of next week’s sales. Auction Amounts The U.S. will probably offer $35 billion of two-year securities on May 22, the same amount of five-year debt on the following day and $29 billion of seven-year notes on May 24, according to Wrightson ICAP LLC, an economic advisory company in Jersey City, New Jersey, that specializes in government finance. U.S. inflation-protected notes pay interest on a principal amount that increases at the same rate as the Labor Department’s consumer price index. The securities have handed investors a 13 percent gain in the year through yesterday, versus 8.8 percent for conventional Treasuries, according to Bank of America Merrill Lynch indexes. Jobs, Manufacturing Most members of the Federal Reserve’s policy setting committee expect recent price rises to prove temporary and that inflation will run at or below the central bank’s preferred 2 percent target, according to the minutes of its latest meeting released yesterday. One member thought there is a risk of faster inflation, especially if the current degree of highly accommodative monetary policy is maintained much beyond this year. Several Fed policy makers said a loss of momentum in growth could warrant additional action to keep the recovery going, the minutes showed. Economic reports in the U.S. today will probably show initial claims for jobless insurance were little changed, manufacturing increased in the Philadelphia area and growth in an index of leading indicators slowed, according to Bloomberg News surveys of economists. The difference between yields on 10-year notes and same- maturity Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, was 2.10 percentage points. The average over the past decade is 2.15 percentage points. Inflation Expectations The five-year, five-year forward break-even rate, a measure of inflation expectations that the Fed uses to help guide monetary policy, was 2.5 percent as of May 14. The figure compares with 2012’s high of 2.78 percent and the five-year average of 2.79 percent. The Fed plans to buy as much as $2 billion of Treasuries due from February 2036 to May 2042 today, according to the Fed Bank of New York’s website. The purchases are part of the central bank’s program to replace $400 billion of shorter-term debt in its holdings with longer maturities by the end of June to help keep down borrowing costs. Greece’s inability to form a government is fueling concern the country will renege on pledges to cut spending as required by the terms of its two bailouts negotiated since 2010, pushing borrowing costs higher and potentially leading it to leave the euro area. Flight to Safety “Investors are flocking to safe assets,� said Bin Gao, the head of interest-rate research in Hong Kong for Asia and the Pacific at Bank of America Merrill Lynch. “If we get Greece dropping out of the euro, I see much lower yields for U.S. Treasuries.� U.S. 10-year rates would approach 1.5 percent, he said, less than the current record low of 1.67 percent. Through last week, investors had offered $3.18 for every dollar of notes and bonds auctioned this year, the most since the government began releasing the data in 1992. China, the largest foreign U.S. creditor, increased its holdings of Treasury debt by 1.3 percent in March to $1.17 trillion, U.S. government data show. Ten-year yields will increase to 2.51 percent by year-end, based on the average forecast in a Bloomberg survey of financial companies, with the most recent projections given the heaviest weightings. 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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