Treasuries headed for a weekly advance on speculation the U.S. employment report today will show the economy is struggling to add jobs, after a decline in hiring last month sent yields to record lows. U.S. government securities held gains from yesterday, when the European Central Bank and People’s Bank of China cut interest rates while the Bank of England increased its asset- purchase program. Slowing U.S. economic growth and inflation are increasing pressure on the Federal Reserve to start a third round of bond purchases. The Fed bought $2.3 trillion of debt in two rounds of so-called quantitative easing, known as QE1 and QE2, from 2008 to 2011 to support the economy by capping yields. “There is a high probability they will do QE3 this year,� said Hiromasa Nakamura, who helps oversee the equivalent of $41.2 billion in Tokyo as an investor at Mizuho Asset Management Co., a unit of Japan’s third-largest publicly traded bank. “The economic situation is weak, and the inflation numbers are declining. These factors will cause U.S. yields to decline.� Benchmark 10-year rates declined one basis point to 1.58 percent as of 12:35 p.m. in Tokyo, according to Bloomberg Bond Trader data. The 1.75 percent note due in May 2022 rose 1/8, or $1.25 per $1,000 face amount, to 101 1/2. The yield slid seven basis points, or 0.07 percentage point, this week. It will be 1.2 percent by year-end, Nakamura said. Japan’s 10-year yield was little changed today at 0.805 percent, declining from 0.83 percent at the end of last week. Payrolls Swell Employers increased U.S. payrolls by 100,000 workers last month after a 69,000 gain in May, according to the median forecast of economists surveyed by Bloomberg News before the Labor Department figures. Last month’s report on June 1 sent 10- year rates to the all-time low of 1.44 percent. There were some signs of improvement in employment yesterday. Fewer Americans filed first-time claims for unemployment insurance payments, a government report showed, and companies added more workers than forecast, based on a private survey. Goldman Sachs Group Inc., one of the 21 primary dealers that trade directly with the U.S. central bank, increased its forecast for today’s employment figure to 125,000 from 75,000, according to a report by economists led by Jan Hatzius in New York. The Fed will probably increase its efforts to spur growth before year-end, said Timothy Bitsberger, a managing director at BNP Paribas SA and a former assistant secretary for financial markets at the Treasury Department. BNP is also a primary dealer. ‘Strong Headwinds’ “I would expect the Fed to do QE3 at some point in the next few months,� Bitsberger said yesterday on Bloomberg Television’s “In the Loop� with Betty Liu. “There are some pretty strong headwinds we need to get through.� The central bank on June 20 expanded so-called Operation Twist, its program to replace $400 billion of short-term Treasuries in its portfolio with longer-term debt to lengthen the average maturity of its holdings, by $267 billion and extended it until year-end. The Fed plans to sell as much as $8 billion of debt maturing from January 2013 to June 2013 today as part of the debt swap, according to the Fed Bank of New York website. Treasuries advanced yesterday as policy makers announced their rate cuts and bond purchases. Pacing Inflation Declining costs in the U.S. economy mean 10-year Treasury rates are approaching the rate of inflation after 13 months of so-called negative real yields. Consumer prices rose at an annual rate of 1.7 percent in May, dropping from 3.9 percent in September. The real 10-year yield was negative 12 basis points. The deficit was as much as negative 2.11 percentage points in October. 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. A search for higher yields than those available on government bonds has buoyed corporate debt. Treasuries have returned 2 percent this year, while and index of investment-grade and high-yield company debt gained 5.9 percent, according to Bank of America Merrill Lynch indexes. The corporate index yields 2.95 percentage points more than Treasuries, with investor demand narrowing the difference from 3.48 percentage points at the end of 2011. 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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