By Wes Goodman April 16 (Bloomberg) -- Treasuries headed for a two-week gain as stocks fell and Federal Reserve Bank of San Francisco President Janet Yellen said inflation is “subdued.” The 10-year note’s real yield, or what investors get after accounting for the cost of living, increased to 1.52 percent from 1.12 percent at the end of 2009. U.S. housing starts quickened in March and consumer confidence increased in April, government and private reports today will show, based on surveys of economists by Bloomberg News. “The current Treasury yield is relatively attractive,” said Hiromasa Nakamura, a senior investor in Tokyo at Mizuho Asset Management Co., which has the equivalent of $20.4 billion in assets. “Deflation pressures are increasing. The economy is still running below its potential.” The 10-year note yield declined two basis points to 3.82 percent as of 6:44 a.m. in London, according to BGCantor Market Data. The 3.625 percent security due in February 2020 rose 1/8, or $1.25 per $1,000 face amount, to a price of 98 3/8. The yield has fallen 12 basis points in two weeks. A basis point is 0.01 percentage point. Ten-year yields will drop to 3 percent by year-end, Nakamura said. His company is part of Mizuho Financial Group Inc., the second-largest publicly traded bank in Japan after Mitsubishi UFJ Financial Group Inc. MSCI’s Asia Pacific Index of shares slid 0.9 percent, snapping a two-day gain and increasing demand for the relative safety of government debt. ‘Inflation Is Subdued’ “The economy is operating well below its potential, inflation is subdued, and such conditions are likely to continue for a while,” Yellen said yesterday in a speech in San Francisco. She is President Barack Obama’s choice to be the central bank’s next vice chairman. Mizuho’s Nakamura is in the minority in saying rates will fall. The 10-year yield will advance to 4.13 percent by year-end, according to a Bloomberg survey of banks and securities companies, with the most recent forecasts given the heaviest weightings. “Ten-year rates will probably continue to have an upward drift,” Michael Gomez, co-head of emerging markets at Pacific Investment Management Co., said in an interview yesterday. Pimco, based in Newport Beach, California, manages the world’s biggest mutual fund, according to data compiled by Bloomberg. “You have a situation in developed countries where you have an outlook for relatively slower growth, and that slower growth comes in part with and in part because of sovereign balance sheets which are heavily debt-laden,” Gomez said. Corporate Bonds President Barack Obama has boosted marketable U.S. debt to a record $7.76 trillion, Treasury figures show. Japan’s government debt totals 871.5 trillion yen ($9.4 trillion), according to the Ministry of Finance. U.S. corporate bonds have outperformed Treasuries this year, thanks to the president’s efforts to sustain the expansion. Company bonds returned 4.1 percent, versus 1.2 percent for government securities, according to indexes compiled by Bank of America Corp.’s Merrill Lynch unit. German bunds gained 2.7 percent, the indexes show, as investors sought the safest investments in Europe while Greece struggled to pay its debt. Japanese government bonds returned 0.2 percent. U.S. housing starts rose to a 610,000 annual rate in March from 575,000 a month earlier, according to the median estimate of 74 economists surveyed by Bloomberg News before the Commerce Department reports the number today. The Reuters/ University of Michigan preliminary consumer sentiment index may have risen to the highest level since January 2008, the surveys show. Price Pressures Growth has yet to spur inflation, Jan Hatzius, chief economist at Goldman Sachs Group Inc. wrote in an e-mail yesterday in New York. “Price pressures continue to recede,” the e-mail said. Goldman Sachs is one of the 18 primary dealers that are required to bid at the government debt sales. The difference between yields on 10-year notes and Treasury Inflation Protected Securities, or TIPS, a gauge of trader expectations for consumer prices, narrowed to 2.36 percentage points from this year’s high of 2.49 points in January. The five-year average is 2.15 percentage points. Treasuries gained yesterday as a report showed initial jobless claims unexpectedly increased to the highest level since Feb. 20, suggesting the U.S. recovery is doing little to lift labor markets. ‘Good Demand’ “There is still good demand for Treasuries around these levels even with the mixed economic data, given the weakness in the labor market,” said Gregory Faranello, head of U.S. rates trading in New York at Banco Espirito Santo SA. “With benign inflation, weak employment and strong manufacturing data, Treasuries will be caught in a range between 3.8 and 4 percent.” The cost of living in the U.S. rose in March, while prices excluding food and energy were unexpectedly unchanged, the Labor Department reported on April 14. Retailers such as Wal-Mart Stores Inc. and Home Depot Inc. are offering discounts to attract consumers. An absence of price pressures is one reason Federal Reserve policy makers last month pledged to keep the benchmark interest rate near zero to fuel the economy. To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.

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