By Cordell Eddings and Susanne Walker May 22 (Bloomberg) -- Treasuries climbed, pushing the benchmark 10-year note yield to the lowest level in a year, as a drop in stocks, a plunging euro and U.S. data showing a lack of inflation damped investor appetite for higher-yielding assets. Thirty-year bond yields touched the lowest level in seven months amid speculation Europe won’t be able to contain its sovereign-debt crisis. Treasuries pared weekly gains yesterday as stocks and the 16-nation currency rose on speculation riskier assets may have fallen too much. The U.S. will sell $113 billion of notes next week. “This week’s move was driven by fear,” said Larry Milstein, managing director in New York of government and agency debt trading at RW Pressprich & Co., a fixed-income broker and dealer for institutional investors. “The risk trade is being unwound and feeding on itself to the benefit of the dollar and U.S. Treasuries. There is no inflation, and any other economics have taken a backseat.” The yield on the 10-year note dropped 22 basis points, or 0.22 percentage point, to 3.24 percent in New York, from 3.45 percent on May 14, according to BGCantor Market Data. It touched 3.10 percent yesterday, the lowest since May 18, 2009. The 30-year bond yield tumbled 24 basis points to 4.10 percent after falling yesterday to as low as 3.98 percent, the least since October. Four-Year Low The Standard & Poor’s 500 Index fell 4.2 percent this week. The euro touched $1.2144 on May 19, its lowest level since 2006, before ending the week at $1.2570, up 1.7 percent. Government data showed unexpected drops in U.S. consumer and producer price indexes in April, fueling speculation the Federal Reserve won’t raise interest rates this year. Both gauges declined 0.1 percent from the previous month. It was the consumer price index’s first fall in more than a year. European Union finance ministers pledged yesterday at a meeting in Brussels to stiffen sanctions on high-deficit countries and ruled out setting up a mechanism to manage state defaults, saying no euro country will be allowed to renege on its debts. It was their fifth meeting in five weeks. Germany’s parliament approved the country’s share of an almost $1 trillion bailout European leaders put together to backstop the region’s debt problem. ‘Double Dip’ “Looking at the longer-term economic impact of the problem in Europe shows that there is an increased risk of a worldwide double-dip recession,” said Guy Lebas, chief fixed-income strategist and economist at Janney Montgomery Scott LLC in Philadelphia. “There is no way to predict or explain the shifting perceptions of risk in this environment.” Fed Governor Daniel Tarullo said the debt crisis may pose a threat to the world economy. “A deeper contraction in Europe associated with sharp financial dislocations would have the potential to stall the recovery of the entire global economy, and this scenario would have far more serious consequences for U.S. trade and economic growth,” Tarullo told a congressional panel on May 20. The crisis has triggered a surge in demand for the safety of U.S. government securities. Treasuries due in 10 years and longer returned 8 percent in the past month after accounting for gains in the dollar, according to data compiled by Bloomberg. That’s the most of 174 bond indexes around the world. The 18 primary dealers that trade with the Fed reported the highest volume of trading in Treasuries since October 2008, after the collapse of Lehman Brothers Holdings Inc., for the week ended May 12, the latest data. It was $679.7 billion. Volatility Surges Volatility in the Treasury market surged over the past week, Bank of America Merrill Lynch’s Move index shows. The gauge rose to 110.9 on May 20, approaching this year’s high of 116.7 set on May 6, when U.S. stocks crashed. The index measures price swings in Treasuries based on over-the-counter options “This looks like a mess,” Kevin Giddis, head of fixed- income sales, trading and research at brokerage firm Morgan Keegan Inc. in Memphis, Tennessee, wrote in a note to clients. “As soon as the euro zone becomes ‘coordinated‘ and ‘orderly,’ the sooner the markets will get back to the fundamentals, which are blossoming in the United States.” The gap between Treasury 2- and 10-year note yields narrowed to the lowest level in six months as investors shed risk. It decreased to 2.47 percentage points yesterday, after closing at 2.91 percentage points April 2, the widest this year. Low 2-year rates spurred demand for higher-yielding longer- term Treasuries, strategists said, as the European crisis cut inflation expectations, boosting longer-term securities’ appeal. “The dynamic is likely to continue,” said David Ader, head of U.S. government bond strategy at CRT Capital Group LLC in Stamford, Connecticut. “We have fundamental support for flattening.” The U.S. will auction $42 billion of two-year notes, $40 billion of five-year debt and $31 billion of seven-year securities on three consecutive days next week, starting May 25. The amounts are $2 billion lower than last month’s offerings of both the two- and the five year notes and $1 billion lower than the seven-year sale. To contact the reporters on this story: Cordell Eddings in New York at ceddings@bloomberg.net; Susanne Walker in New York at swalker33@bloomberg.net

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