Treasuries headed for their biggest weekly gain since May before a government report today that may show the U.S. lost jobs in June for the first time this year, fueling speculation the economic recovery is fading. Securities with longer maturities led the advance, leaving the difference between two- and 10-year yields near the lowest since October as traders bet that an economic slowdown will contain inflation. U.S. employers cut 130,000 jobs last month, a Labor Department report will show today, according to economists in a Bloomberg survey. The MSCI World Index headed for a second week of losses, boosting demand for the safety of fixed income. “A negative jobs number will continue the positive mood toward Treasuries,” said Luca Cazzulani, a fixed-income strategist at UniCredit SpA in Milan. “We’ve had some fairly disappointing data that suggests the economy has peaked and that the momentum is going to slow down.” The benchmark 10-year note yield dropped less than one basis point to 2.94 percent as of 7:45 a.m. in London, according to BGCantor Market Data. The 3.5 percent security due May 2020 rose 2/32 or 63 cents per $1,000 face amount, to 104 24/32. The yield declined 17 basis points this week, the most since May 21. The two-year yield was at 0.63 percent after dropping to a record low of 0.5856 percent on June 30. The spread between the two securities was at 231 basis points today. It dropped yesterday to 227 basis points, the least since Oct. 2. A narrowing spread indicates investor preference for longer-term bonds, which tend to rise on slowing inflation. Two-year yields tend to track the outlook for the Fed’s target rate for overnight lending. Previous Payrolls The MSCI World Index of shares has dropped 3.8 percent this week, boosting demand for the relative safety of government debt and adding to a 3.2 percent decline in the five days through June 25. The loss in U.S. jobs forecast by 82 economists surveyed by Bloomberg will reverse the previous month’s 431,000 gain and will be the first since December. The Labor Department is scheduled to release the data at 8:30 a.m. in Washington. Ten-year yields tumbled 16 basis points after the previous employment report on June 4, which showed the U.S. added fewer positions than economists predicted. The drop in yields was the biggest in a single day since March 18, 2009, when the Federal Reserve surprised investors with plans to purchase as much as $300 billion in government debt. Ten-year notes fell earlier on speculation yields near the lowest in 14 months aren’t justified given forecasts the U.S. economy will keep expanding even if the pace of growth slows. “Yields must rise,” said Hiroki Shimazu, a market economist in Tokyo at Nikko Cordial Securities Inc., part of Japan’s third-largest publicly traded bank. “The economic expansion will continue.” ‘Worst’ Flattening Ten-year yields will advance to 3.70 percent by year-end, according to a Bloomberg survey of banks and securities companies with the most recent forecasts given the heaviest weightings. Shimazu predicts they will climb above 3.50 percent. “The flattening of the yield curve has been the worst kind,” Anthony Crescenzi, a money manager at Newport Beach, California-based Pimco, wrote to clients yesterday. It occurred during “a decline in market interest rates on both ends of the yield curve. Investors have become less optimistic about the outlook for both the U.S. and global economy.” The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices, was at 1.79 percentage points, dropping from the record high of 2.49 percentage points in January. To contact the reporters on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net.

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