By Susanne Walker and Cordell Eddings June 5 (Bloomberg) -- Treasuries rose, pushing the yield on the two-year note down the most in almost a month, as U.S. employers added fewer jobs in May than forecast and Europe’s deficit crisis spread to Hungary. “The sovereign-risk picture in Europe seems to be lingering, and U.S. fundamentals are not as strong as the market thought, sustaining a flight-to-quality bid,” said Larry Milstein, managing director of government and agency debt trading in New York at R.W. Pressprich & Co., a fixed-income broker and dealer for institutional investors. U.S. debt also rose this week as the government prepared to sell $70 billion of notes and bonds, compared with $78 billion at the last sale of similar securities, marking the biggest drop in the total sale amount since global credit markets collapsed. The yield on the two-year note dropped five basis points, or 0.05 percentage point, to 0.73 percent, according to BGCantor Market Data. It was the biggest weekly decrease since the five days ended May 7, when the yield fell 15 basis points. The price of the 0.75 percent security due in May 2012 increased 3/32, or 94 cents per $1,000 face amount, to 100 2/32. An increase of more than 1 point in the price of the 30- year bond pushed the yield down 8 basis points to 4.13 percent. The 10-year note yield dropped 9 basis points to 3.20 percent after touching 3.19 percent, the lowest since May 27. Yields on 10-year notes fell yesterday by the most in more than two weeks on an intraday basis after the Labor Department reported that U.S. employers added 431,000 jobs to nonfarm payrolls in May after an increase of 290,000 in the previous month. The median forecast of 82 economists in a Bloomberg News survey was for 536,000 more jobs. Private Payrolls Private payrolls rose by 41,000 as the total included an increase of 411,000 jobs in the government’s hiring of temporary help for the 2010 census. The unemployment rate dropped to 9.7 percent, from 9.9 percent. “When public-sector jobs outpace private-sector jobs by a factor of nearly 10 to 1, it’s not the sturdiest of economic foundations to build upon,” 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. The unemployment rate may rise to 10 percent within the next several months, with job growth “anemic,” Bill Gross, co-chief investment officer at Newport Beach, California-based Pacific Investment Management Co. and manager of the world’s biggest bond fund, said yesterday in a radio interview on Bloomberg Surveillance with Tom Keene. “The market was assuming that the private sector was coming back, but obviously we’ve seen none of that,” Gross said. Gross’s Assessment Treasuries are the premier holdings for fixed-income investors, according to Gross, who said U.S. notes in the 5- to 10-year range and 30-year bonds have become “the focus for us.” He boosted his fund’s investment in U.S. government- related debt in April to the highest level in five months. The U.S. government will sell $36 billion in 3-year debt, $21 billion in 10-year notes and $13 billion in 30-year bonds on three consecutive days beginning June 8. The 10-year yield fell 37 basis points last month as Europe’s sovereign-debt crisis led investors to take refuge in government securities. It was the biggest decrease since the Fed cut its target lending rate to a record low in December 2008. Hungary’s economy is in a “grave situation” because the previous government “manipulated” figures and “lied” about the state of the economy, said Peter Szijjarto, a spokesman for the prime minister, at a news conference yesterday in Budapest. “I don’t think it’s an exaggeration at all” to talk about a default, the spokesman said. ‘Existing Nervousness’ “The comments out of Hungary are adding to existing nervousness in the euro bloc,” said Mark Schofield, head of interest-rate strategy in London at Citigroup Inc., one of the 18 primary dealers obligated to participate in Treasury auctions. “There’s a flight to quality.” Group of 20 finance chiefs signaled before concluding talks in Busan, South Korea, today that they will delay introducing new rules aimed at forcing banks to raise the quality and quantity of capital they hold to buffer against the financial crisis. Euro-area officials had expressed concern that haste would hurt economic growth. The euro dropped yesterday below $1.20 for the first time since March 2006 on Europe’s fiscal crisis. The Standard & Poor’s 500 Index tumbled 2.1 percent for the week. To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net; Cordell Eddings in New York at ceddings@bloomberg.net

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