By Theresa Barraclough May 28 (Bloomberg) -- Treasuries rose, heading for the best month since January, as concern the European fiscal crisis will undermine the euro helped boost demand for the safest securities. Ten-year notes snapped two days of losses before a government report that economists said will show inflation remained subdued, easing concern price increases will erode the value of the fixed payments from debt. The euro was set for a sixth monthly drop against the dollar after Treasury Secretary Timothy F. Geithner said the U.S. and Europe are in “broad agreement” on the need for tighter market regulation. “People are still seeking safety,” said Satoshi Okumoto, a general manager in Tokyo at Fukoku Mutual Life Insurance Co., which has the equivalent of $63.3 billion in assets. “The euro is quite vulnerable.” The yield on the benchmark 10-year note fell three basis points to 3.33 percent as of 12:16 p.m. in Tokyo, according to data compiled by Bloomberg. The 3.5 percent security due May 2020 gained 9/32, or $2.81 per $1,000 face amount, to 101 14/32. Treasuries have handed investors a 1.4 percent return this month, the most since a 1.58 percent gain in January, indexes compiled by Bank of America Corp.’s Merrill Lynch unit showed. Ten-year yields slid from 3.65 percent on April 30 to 3.06 percent on May 25, the lowest level since April 2009. ‘Broad Agreement’ “The U.S. and Europe are in broad agreement on the importance of putting in place more conservative” approaches to taking risk, Geithner said yesterday in Berlin. While there’s a need to get the “balance right,” “we all agree you want to have more conservative constraints on leverage and capital.” Yields indicate banks have become less willing to lend, suggesting the European crisis is far from over. The London interbank offered rate, or Libor, which banks pay for three-month loans in dollars, rose to 0.538 percent yesterday, advancing for a 13th day, according to the British Bankers’ Association. The extra yield Libor offers over the overnight indexed swap rate, the Libor-OIS spread, widened to 31 basis points, near the most since July. The Fed’s preferred price measure, which is tied to spending patterns and excludes food and fuel, rose 0.1 in April and was up 1.1 percent from a year earlier, according to a Bloomberg News survey before today’s report. The annual gain would be the slowest since September 2001. Inflation Outlook The spread between yields on 10-year notes and Treasury Inflation-Protected Securities, or TIPS, show money managers expect consumer prices to increase an average 2.08 percent annually in the next 10 years, down from 2.39 percent a month ago. The figure was as low as 1.83 percent on May 21, the least since Oct. 9. Ten-year notes still headed for the largest weekly drop since April before a government report that economists said will show consumer spending rose last month, adding to signs the world’s largest economy is recovering. Yields have added 10 basis points this week. “Some economic data suggests things are getting better,” said Akira Takei, a manager of international bond investments in Tokyo at Mizuho Asset Management Co., a unit of Japan’s second-largest bank. Yields may rise today, he said. Consumer spending increased 0.3 percent in April, the seventh month of gains, according to a separate Bloomberg survey before today’s report. The data may signal household spending, which accounts for about 70 percent of the economy, will contribute more to growth in coming months as incomes rise. U.S. gross domestic product expanded at an annual 3 percent rate last quarter, below an advance estimate of 3.2 percent issued last month, a Commerce Department report showed yesterday. “Three percent GDP is quite strong versus Europe,” Ray Remy, head of fixed income in New York at primary dealer Daiwa Securities Group Inc., said yesterday. “The economic recovery is on track. It’s moderating, but it will continue.” To contact the reporter on this story: Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net;

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