By Keith Jenkins June 17 (Bloomberg) -- Ten-year Treasuries fell as a bond sale by Spain eased concern that Europe’s debt crisis is spreading, boosting stock markets and eroding demand for the relative safety of U.S. securities. The decline sent the yield up from near the lowest this week as Spain sold 3.5 billion euros ($4.3 billion) of bonds today, its maximum target. U.S. notes rose earlier before reports economists said will show manufacturing growth in the Philadelphia region slowed and consumer prices fell. The Stoxx Europe 600 Index climbed for a seventh day, rising 0.4 percent. “Spanish bonds performed well after the auction, and Treasuries slipped as a result,” said Harvinder Sian, a senior bond strategist at Royal Bank of Scotland Group Plc in London. The reports today “have bullish risk for the market,” Sian said. The yield on the 10-year note rose two basis points to 3.28 percent as of 6:30 a.m. in New York, according to BGCantor Market Data. It fell to 3.24 percent earlier, within two basis points of the 3.22 percent reached two days ago. The 3.5 percent security due May 2020 fell 6/32, or $1.88 per $1,000 face amount, to 101 26/32. Market turmoil stemming from the sovereign debt crisis which started in Greece has spurred demand for the perceived safety of U.S. government bonds. The 10-year note yield fell almost one percentage point between April 5 and May 25 when it reached 3.06 percent, the lowest since April 2009. ‘Major Risk’ 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 in a report prepared for a June 4-5 meeting in Busan, South Korea, and released yesterday. 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 the median forecast of 79 economists in a separate Bloomberg survey. 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 2.03 percent annually in the next 10 years, down from 2.41 percent at the end of 2009. Interest Rates Futures on the CME Group Inc. exchange show a 29 percent chance the Fed will raise its benchmark rate by at least a quarter-percentage point by its December meeting, down from 38 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. 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. Spanish bonds rose after the auction, pushing the yield on the 10-year security down from the highest level since July 2008. The country sold 2020 and 2041 bonds at yields below the prevailing market rates, and attracted bids worth as much as 2.45 times the securities on offer. The yield premium investors demand to hold Spanish 10-year government bonds instead of German bunds, the euro-region’s benchmark securities, was at 209 basis points after the auction results. It rose to 221 basis points yesterday, the most since before the introduction of the euro, based on close-of-day generic data. “The strong demand for Spanish bonds should help restore confidence,” said Ciaran O’Hagan, fixed income strategist at Societe Generale SA in Paris. Treasuries have returned 4.4 percent since the start of this year, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies. German bunds, the euro-area’s benchmark securities, have returned 6.5 percent, while Spanish debt declined 4.3 percent, the indexes showed. To contact the reporter on this story: Keith Jenkins in London at kjenkins3@bloomberg.net;

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