July 19 (Bloomberg) -- Treasury 10-year futures contracts held gains from a three-day rally as economists said reports this week will show U.S. housing starts fell and a measure of the outlook for economic growth declined. Two-year yields were near a record low as declines in stocks around the world boosted demand for the relative safety of government debt. The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of expectations for consumer prices, narrowed to 1.71 percentage points, three basis points away from a nine-month low. “U.S. Treasuries are still attractive,” said Sungjin Park, who helps oversee the equivalent of $51 billion in debt assets as head of fixed income in Seoul at Samsung Investment Trust Management, South Korea’s largest private investor. “A double-dip recession is inevitable” in the U.S., he said. The implied yield on 10-year futures contracts for September delivery was little changed at 3.25 percent as of 1:13 p.m. in Singapore, based on electronic transactions at the Chicago Board of Trade. The price was 123 9/32. The contracts have risen for three straight days, pushing yields down 13 basis points last week, the most since the period ended May 21. Two-year notes yielded 0.58 percent, after falling to 0.5765 percent on July 16, the lowest ever, according to data compiled by Bloomberg. Trading of bills, notes and bonds was shut in Japan today for a holiday. Housing Slows Forecasts for a U.S. recession will prove to be wrong, according to Adam Carr, an economist at ICAP Australia Ltd. in Sydney, a unit of the world’s largest inter-dealer broker. Stock declines that sent the Standard & Poor’s 500 Index down 2.9 percent on July 16, the most in two weeks, were “truly bizarre,” he wrote in a note to clients. “Friday’s session was pure overkill.” A Federal Reserve report the day before showed U.S. industrial production “continues to power ahead,” he said. Growth Forecast U.S. central bankers last month lowered their forecast for 2010 growth to 3 percent to 3.5 percent, from 3.2 percent to 3.7 percent, according to minutes of the meeting issued last week. Gross domestic product contracted 2.4 percent last year. Fed Chairman Ben S. Bernanke is scheduled to give his semiannual report on the economy to Congress on July 21. A Bloomberg survey of banks and securities companies projects the 10-year yield will advance to 3.34 percent by year- end, with the most recent forecasts given the heaviest weightings. Investors in a weekly survey by Ried Thunberg ICAP Inc., another ICAP unit, became more bearish on U.S. debt. The company’s index on the outlook for Treasuries through December fell to 41 as of July 16 from 43 the week before. A figure less than 50 shows investors expect prices to fall. The company, based in Jersey City, New Jersey, said it surveyed 20 fund managers overseeing $1.37 trillion. China Should Reduce China should reduce its U.S. dollar assets, Yu Yongding, a former adviser to the Chinese central bank, wrote in a commentary published in today’s China Securities Journal. The proportion of dollar assets in China’s reserves is too high, Yu wrote. When demand for Treasuries is high, it will offer China a “rare opportunity” to cut holdings, Yu wrote. China is America’s largest creditor, owning $867.7 billion of the $8.1 trillion in publicly traded debt. The combination of the slowest U.S. inflation rate in four decades and concern that the global recovery will falter is bolstering the case for lower yields. Consumer prices excluding energy and food remained at a 44-year low of 0.9 percent in June, the Labor Department reported July 16. Samsung Investment’s Park said he is among investors favoring 10-year notes, which are some of the debt that will benefit most from low inflation because of their long maturities. Demand for the 2020 securities narrowed their yield over two-year rates to 2.34 percentage points from a record of 2.94 percentage points on Feb. 18. For the first time since the government started collecting the data, central banks, mutual funds and U.S. banks are buying more government securities at Treasury auctions than Wall Street’s bond dealers. Foreign and domestic investors bidding directly at note and bond auctions bought 57 percent of the $1.26 trillion in Treasuries sold by the government this year, up from 45 percent during the same period in 2009 and as little as 32 percent for all of 2008, according to government data compiled by Bloomberg. Bids compared with the amount of debt sold, the bid-to- cover ratio, rose 18 percent from last year’s 14-year high, according to the data that Treasury started collecting in 1994. --With assistance from Jian Guo Jiang in Shanghai and Daniel Kruger in New York. Editors: Garfield Reynolds, Nicholas Reynolds. To contact the reporters on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net. To contact the editor responsible for this story: Nicholas Reynolds at nreynolds2@bloomberg.net.

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