By Keith Jenkins and Theresa Barraclough April 19 (Bloomberg) -- Treasury 10-year yields reached the lowest level in more than three weeks as an investigation into alleged fraud at Goldman Sachs Group Inc. spread to Europe, sending stocks lower and boosting demand for the safest assets. The 10-year note extended last week’s advance as U.K. and German officials said authorities in their countries may probe Goldman Sachs’s activities following last week’s U.S. Securities and Exchange Commission suit. An International Monetary Fund mission to Athens to discuss aid for Greece was delayed because ash from a volcano in Iceland disrupted air travel. The difference between two- and 10-year yields was near the least in three weeks on bets inflation will remain subdued. “Treasuries are seeing safe-haven demand after declines in equities on the Goldman news put risk on the back foot,” said Peter Chatwell, an interest-rate strategist at Credit Agricole Corporate and Investment Bank in London. “Near-term direction in Treasuries will come from developments in equities. There’s still plenty of uncertainty on the Greek front as well.” The yield on the benchmark 10-year note was little changed at 3.76 percent as of 6:04 a.m. in New York, according to BGCantor Market Data. The yield dropped earlier to 3.74 percent, the lowest since March 24. The 3.625 percent security due February 2020 rose 1/32, or 31 cents per $1,000 face amount, to 98 28/32. The MSCI World Index of shares fell for a second day, sliding 0.7 percent, after U.S. stocks dropped on April 16 by the most since February. Goldman Sachs tumbled as much as 16 percent that day after the firm was sued by regulators for fraud tied to collateralized debt obligations. “Flight-to-quality risks have the potential to persist over the near-term,” analysts at JPMorgan Chase & Co. wrote in a weekly report received today. Goldman Sachs Probes U.K. Prime Minister Gordon Brown yesterday called for the Financial Services Authority to start an investigation into Goldman Sachs, saying he was “shocked” at the “moral bankruptcy” indicated in the suit. Germany’s financial regulator, Bafin, asked the SEC for details on the suit, a spokesman for Chancellor Angela Merkel said. The European Union is also probing Goldman Sachs’s role in arranging swaps for Greece that may have masked the country’s budget deficit. Concern the global recovery is facing headwinds has helped send 10-year yields down from the 4.01 percent they reached on April 5, the highest level since October 2008. Janet Yellen, president of the Federal Reserve Bank of San Francisco, said last week she supports the central bank’s pledge to keep borrowing costs low for an “extended period” because “the economy is operating well below its potential, inflation is subdued, and such conditions are likely to continue.” Fed Target The Fed’s target rate for overnight loans between banks has been at a record low of between zero and 0.25 percent since December 2008. The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices, fell to 2.32 percentage points today from this year’s high of 2.49 percentage points set in January. Signs inflation is contained will encourage investors to buy longer-maturity bonds, flattening the so-called yield curve, according to Mizuho Asset Management. The difference in yield between two- and 10-year notes, which was at 2.81 percentage points today, is likely to narrow to 2.22 percentage points by year-end, a weighted Bloomberg survey of economists showed. German Bunds Wholesale prices excluding food and energy costs rose 0.1 percent in March, the same as the prior month, according to a Bloomberg survey before the Labor Department report on April 22. The cost of living in the U.S. rose 0.1 percent in March, while prices excluding food and energy were unchanged, the Labor Department said April 14. The index of leading indicators rose 1 percent last month, according to the median estimate of 41 economists in a Bloomberg survey before the report is released today. Ignis Asset Management added to a bet that U.S. debt will beat German bunds after the $61 billion rescue for Greece was announced April 11. Yields on 10-year bunds rose as much as 0.24 percentage point relative to similar-maturity Treasuries from April 5 through last week and BlackRock Inc., the world’s largest money manager, said it no longer pays to own the debt amid Europe’s fiscal crisis. ‘Rally is Over’ “The bund rally is over,” said Stuart Thomson, a money manager at Ignis in Glasgow, Scotland, who helps oversee more than $100 billion. “Greece ultimately has to default and bund yields will have to rise as Germany funds the Greek rescue over the next two to three years.” After returning three times more than Treasuries since Sept. 15, 2008, as investors favored the debt of nations with the lowest budget deficits, sentiment toward bunds is turning on speculation the aid package may be the first step in a unified fiscal policy. Europe’s “game of fiscal chicken” promises to make governments less determined to cut deficits, according to BNP Paribas SA, France’s biggest bank. Investors remained the least bearish this year on U.S. government debt, according to a survey of money managers by Ried Thunberg ICAP Inc. The company’s index measuring the outlook for Treasuries through the end of June was 46, matching the highest this year. A figure less than 50 shows investors expect prices to decline. The company, based in Jersey City, New Jersey, interviewed 21 fund managers controlling $1.32 trillion of assets. To contact the reporters on this story: Keith Jenkins in London at Kjenkins3@bloomberg.net; Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net

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