By Yasuhiko Seki and Theresa Barraclough June 17 (Bloomberg) -- Treasuries rose for a second day as speculation the global economy is slowing boosted demand for the relative safety of government debt. Longer-maturity bonds led gains before reports that economists said will show manufacturing growth in the Philadelphia region slowed and consumer prices fell. Financial market instability poses a “major downside risk” to global economic growth and “urgent action” is needed to rein in government budget deficits, the International Monetary Fund said. “There are doubts about the sustainability of the global recovery,” said Akira Takei, a fund manager in Tokyo at Mizuho Asset Management Co., a unit of Japan’s second-largest bank. “Risk sentiment remains weak, supporting continued capital flight into safer assets, such as bonds.” The yield on the 10-year note fell two basis points to 3.25 percent as of 6:46 a.m. in London, according to data compiled by Bloomberg. The 3.5 percent security due May 2020 rose 1/8, or $1.25 per $1,000 face amount, to 102 1/8. The Federal Reserve Bank of Philadelphia’s general economic index fell to 20 this month from 21.4 in May, according to a Bloomberg survey before today’s report. Consumer prices dropped 0.2 percent in May, after declining 0.1 percent the previous month, according to a separate Bloomberg survey. European ‘Turmoil’ “People feel comfortable holding onto Treasuries just in case turmoil in Europe flares up again,” said Kazuaki Oh’e, a debt salesman in Tokyo at Canadian Imperial Bank of Commerce, the North American nation’s fifth-largest lender. Today’s CPI “report will confirm that we don’t have to worry about inflation at the moment. For a Treasury buyer, this information is very encouraging.” The difference in yield between Treasury Inflation- Protected Securities, or TIPS, and 10-year notes show money managers expect the consumer price index to increase an average 2.04 percent annually in the next 10 years, down from 2.41 percent at the end of 2009. Futures on the CME Group Inc. exchange show a 28 percent chance the Fed will raise its benchmark rate by at least a quarter-percentage point by its December meeting, down from 40 percent odds a month earlier. The U.S. central bank lowered its fed funds target rate to a range of zero to 0.25 percent in December 2008 to reduce borrowing costs and stimulate the economy. The Federal Open Market Committee next meets to review rates June 22-23. ‘Extended Period’ The Federal Reserve will keep the rate unchanged for a “very extended period” as Europe’s austerity measures curb world demand, said Paul McCulley of Pacific Investment Management Co. “If you got a deflationary fiscal policy in Europe you’re going to have a deficiency of global aggregate demand and the Fed should be on hold,” McCulley, managing director at Newport Beach, California-based Pimco, said in an interview with CNBC. Treasuries advanced yesterday after a report showed U.S. housing starts fell the most since March 2009 and the premium investors demand to hold Spanish government bonds over German bunds rose to a euro-era record. “The worries about the euro zone and the speed in which the U.S. recovery is currently moving has almost ‘forced’ investors back into the Treasury market,” Kevin Giddis, president of fixed income in Memphis, Tennessee, at the brokerage firm Morgan Keegan Inc., wrote in a note to clients. Investors “would rather have their money safe and close rather than chasing a higher yield,” he said. Bond Redemptions Spain plans to sell 3.5 billion euros ($4.3 billion) of 2020 and 2041 bonds today. The country faces 16.2 billion euros of bond redemptions next month and the decline in its debt in secondary markets means it will have to offer higher returns to attract investors. Spanish and Portuguese debt levels may “snowball” in coming years and more budget cuts are needed, according to a draft European Commission document obtained by Bloomberg News this week. “Unless promptly addressed by credible policy action, financial-market stresses could have material effects on growth,” the IMF said in the report prepared for a June 4-5 meeting in Busan, South Korea, and released yesterday. Treasuries have returned 4.3 percent this year, according to indexes from Bank of America Corp.’s Merrill Lynch unit. German bunds have returned 6.5 percent, while Spanish securities have lost 4.5 percent, the indexes show. The cost of protecting Asia-Pacific corporate and sovereign bonds from non-payment declined, according to traders of credit- default swaps. The Markit iTraxx Japan index fell two basis points to 135 basis points, according to Morgan Stanley. The Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan fell two basis points to 131 basis points, Royal Bank of Scotland Group Plc prices show. Credit-default swap indexes are benchmarks for protecting debt against default and traders use them to speculate on credit quality. An increase suggests deteriorating perceptions of creditworthiness and a drop shows improvement. To contact the reporter on this story: Yasuhiko Seki in Tokyo at yseki5@bloomberg.net; Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net.

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