By Paul Dobson and Wes Goodman May 18 (Bloomberg) -- Ten-year Treasury notes rose, narrowing the difference in yield with inflation-protected securities, before reports that may show the cost of living is being held in check. The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices, narrowed for a fourth day. U.S. bonds pared gains as stocks advanced in Europe, damping demand for the safest fixed-income assets. Concern Greece’s debt crisis would slow economic growth sent Treasury yields lower this month. “Inflation expectations have pretty much stalled,” said Orlando Green, an interest-rate strategist at Credit Agricole Corporate and Investment Bank in London. “They have been dampened because of events in the euro zone.” The yield on the 10-year note fell more than one basis point to 3.48 percent as of 10:25 a.m. in London, according to BGCantor Market Data. The 3.5 percent security due May 2020 rose 3/32, or 0.94 cents per $1,000 face amount, to 100 6/32. The two-year yield was at 0.79 percent. The spread between yields on 10-year notes and TIPS shrank one basis point to 2.20 percentage points, the lowest level since May 10. It was 2.10 percentage points on May 7, the least since November. Debt Crisis Ten-year yields have dropped about half a percentage point, or 50 basis points, from this year’s April 5 high of 4.01 percent amid concern that Greece’s debt crisis would spread to Europe’s other indebted nations and precipitate the collapse of the euro. Treasuries pared their gain today as the Stoxx Europe 600 Index of shares rose as much as 1.3 percent and the euro recovered from near its lowest level since 2006. European finance ministers said reactions to the Greek debt crisis won’t tip the region’s economy back into a recession. “The euro has turned round a bit and equities are coming back, so we’re seeing a bit of a countermove to what we saw earlier in Treasuries,” said Peter Schaffrik, co-head of interest-rate strategy at Commerzbank AG in London. Retailers are helping keep a lid on inflation by offering discounts to attract consumers coping with a 9.9 percent rate of unemployment and rising foreclosures. An absence of price pressures is one reason why Federal Reserve policy makers last month pledged to keep the benchmark interest rate near zero in coming months to fuel the economy. Consumer prices excluding food and energy costs rose 1 percent in April from a year earlier, according to a Bloomberg survey before tomorrow’s Labor Department report. That would be the least since 1966. Reports today will show producer prices rose 0.1 percent in April, down from March’s 0.7 percent gain, while housing starts increased, separate Bloomberg surveys show. ‘Modest’ Inflation “Inflation pressures are very modest and still declining,” said Peter Jolly, the Sydney-based head of market research for the investment-banking unit of National Australia Bank Ltd., the nation’s largest lender. “That will put a lid on bond yields.” National Australia reduced its year-end prediction for 10- year yields to 4 percent from 4.25 percent, Jolly said. U.S. 30-year average fixed-mortgage rates slid to 4.94 percent yesterday, the least since December, according to Bankrate.com in North Palm Beach, Florida. The 10-year rate will climb to 4.02 percent by Dec. 31, according to a Bloomberg survey of banks and securities companies with the most recent forecasts given the heaviest weightings. The forecast was 4.12 percent a week ago. To contact the reporters on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net; Paul Dobson in London at pdobson2@bloomberg.net

Source