By Keith Jenkins and Wes Goodman April 16 (Bloomberg) -- Treasuries rose, headed for a second week of gains, as stocks fell after China moved to cool its property market and traders raised bets the Federal Reserve will keep interest rates at a record low through year-end. The gains drove the yield on the 10-year note to within a basis point of the lowest since March 24 as the MSCI World Index snapped a two-day advance. Fed Bank of San Francisco President Janet Yellen said yesterday inflation is “subdued,” adding to speculation policy makers will avoid rate increases this year. “There’s a slightly weaker tone to equity markets, which is giving a bit of a prop to bonds,” said Marc Ostwald, a fixed-income strategist at Monument Securities Ltd. in London. “On the rates side of the equation, there’s little sign that the Fed is in any hurry to move at all.” The 10-year note yield declined 2 basis points to 3.82 percent as of 9:45 a.m. in London, according to BGCantor Market Data. The 3.625 percent security due in February 2020 rose 4/32, or $125 per $1,000 face amount, to 98 13/32. The yield has fallen 12 basis points in the past two weeks. The 10-year note’s real yield, or what investors get after accounting for the cost of living, was 1.51 percent today, compared with 1.12 percent at the end of 2009. While the cost of living in the U.S. rose 0.1 percent in March, prices excluding food and energy were unexpectedly unchanged, the Labor Department reported two days ago. Policy makers have kept the target interest rate for overnight loans in a range of zero to 0.25 percent since December 2008. Last month Fed officials repeated a pledge to keep rates low for an “extended period,” citing employers’ reluctance to add jobs and depressed home building. ‘Below Potential’ Futures on the Chicago Board of Trade show 67 percent odds U.S. policy makers will raise the main interest rate by at least 0.25 percent by December, down from a 76 percent chance a month ago. “The economy is operating well below its potential, inflation is subdued, and such conditions are likely to continue for a while,” Yellen, who is President Barack Obama’s choice to be the central bank’s next vice chairman, said in San Francisco. “Yellen’s comments very much reinforced market expectations that interest rates will stay low,” Ostwald said. The MSCI World Index of shares slid 0.2 percent, snapping a two-day gain, as traders sought the relative safety of government debt. The Chinese government said today it will raise minimum mortgage rates and down payment ratios for buyers of more than one home as it seeks to cool economic growth. The yield on the U.S. 10-year note has fallen 6 basis points this week and the German 10-year bund 5 basis points, partly on concern Greece will need to tap a European Union-led bailout package if it’s to avoid a default. Record Debt Sales “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.” Ten-year yields will drop to 3 percent by year-end, according to Nakamura, whose company is part of Mizuho Financial Group Inc., the second-largest publicly traded bank in Japan after Mitsubishi UFJ Financial Group Inc. The median of 55 analysts’ forecasts compiled by Bloomberg, with the most recent forecasts given the heaviest weightings, is for the yield to end the year at 4.13 percent. Obama has boosted marketable U.S. debt to a record $7.76 trillion to pull the economy out of the worst recession since the 1930s. Japan’s government debt totals 871.5 trillion yen ($9.4 trillion), according to the Ministry of Finance. U.S. Data U.S. housing starts climbed to a 610,000 annual rate in March from 575,000 a month earlier, the Commerce Department will say today, according to the median estimate of 74 economists surveyed by Bloomberg. The Reuters/University of Michigan preliminary consumer sentiment index may have risen to the highest level since January 2008, according to the median estimate of 68 economists in a separate Bloomberg survey. U.S. corporate bonds have outperformed Treasuries this year amid the Fed’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. Japanese government bonds returned 0.2 percent. Breakeven Rates 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 today, 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. “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.” To contact the reporters on this story: Keith Jenkins in London at Kjenkins3@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net

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