By Wes Goodman March 26 (Bloomberg) -- Treasuries rose as some investors said a surge in yields to the highest level in nine months makes government securities worth buying given the Federal Reserve’s promise to keep interest rates at a record low. Benchmark 10-year notes advanced for the first time in four days before an industry report that economists said will show U.S. consumer confidence declined in March for a second month. Government securities still headed for the biggest weekly loss this year after bidding waned at three auctions and Bill Gross, who runs the world’s biggest bond fund, said he favors higher-yielding securities. “The current level is relatively attractive” in the Treasury market, said Hiromasa Nakamura, a senior investor who helps oversee the equivalent of $20.5 billion in Tokyo at Mizuho Asset Management Co., part of Japan’s second-largest bank by assets. “The U.S. economy is not so good. Low interest rates will continue.” The 10-year yield fell two basis points to 3.86 percent as of 1:31 p.m. in Tokyo, according to data compiled by Bloomberg. The 3.625 percent security due in February 2020 rose 1/8, or $1.25 per $1,000 face amount, to 98 2/32. The Reuters/University of Michigan final consumer sentiment index for this month fell to 73 from 73.6 in February, according to the median of 64 projections in a Bloomberg News survey. The preliminary reading, released March 12, was 72.5. Yields Surge Ten-year yields surged 17 basis points this week, the most since the period ended Dec. 25. The yield climbed to 3.92 percent yesterday, the highest level since June 11. Gross, the co-chief investment officer at Pacific Investment Management Co., said the almost three-decade bond- market rally may be drawing to a close. Excess borrowing in nations including the U.S., U.K. and Japan will eventually lead to inflation as governments sell record amounts of debt to finance surging deficits, Gross said. “Bonds have seen their best days,” Gross said in a Bloomberg Radio interview yesterday from Pimco’s headquarters in Newport Beach, California. “We are focused more in spread space.” The extra yield that U.S. corporate bonds offer over Treasuries shrank to 2.54 percentage points, the least in 28 months, according to indexes compiled by Bank of America Corp. The narrowing indicates are willing to accept lower rates to purchase the securities. Corporate Bonds The index returned 2.6 percent so far in 2010, versus 0.7 percent for Treasuries, the Bank of America figures show. German government bonds gained 2.4 percent, according to the indexes, as investors sought the relative safety of bunds while Greece struggled to curb the European Union’s largest budget deficit. Demand waned at record-matching auctions of two-, five- and seven-year notes this week as signs of improvement in the economy boosted demand for higher-yielding assets. At the seven-year sale yesterday, investors bid for 2.61 times the amount of debt on offer, the least in 10 months. President Barack Obama has increased the U.S. marketable debt to a record $7.4 trillion as he borrows to sustain the economic expansion. “We were surprised that the market was so weak,” said Kazuaki Oh’e, a bond salesman in Tokyo at CIBC World Markets Japan Inc., part of Canada’s fifth-largest lender. “It kind of snowballed. Money is not going into Treasuries because of the economic recovery.” Swap Spreads U.S. 10-year interest-rate swap spreads turned negative for the first time on record this week as investors sought higher-yielding assets. The gap between the rate to exchange floating- for fixed- interest payments and comparable-maturity Treasury yields for 10 years shrank to negative 10.2 basis points yesterday, the narrowest since at least 1988, when Bloomberg began collecting the data. The spread was negative 7.5 basis points today. Western Asset Management Co., which oversees $506.4 billion of bonds, said inflation is “subdued,” and it is favoring longer maturities. The difference between short- and long-term yields is poised to narrow, Michael Zelouf, the company’s London-based director of international business, wrote in a press release today. The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices, has narrowed to 2.26 percentage points from this year’s high of 2.49 percentage points set Jan. 11. The five-year average is 2.15 percentage points. Yield Curve The spread between two- and 10-year yields narrowed to 2.80 percentage points from a record of 2.94 percentage points on Feb. 18. It was as low as 2.65 percentage points on March 24, the least this year. The Fed says it plans to keep interest rates at a record low. Policy makers cut the target for overnight loans between banks to a range of zero to 0.25 percent in December 2008. “The economy continues to require the support of accommodative monetary policies,” Fed Chairman Ben S. Bernanke said yesterday in testimony before lawmakers. The central bank will be ready to tighten credit “at the appropriate time,” he said. To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.

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