By Lukanyo Mnyanda and Candice Zachariahs Aug. 10 (Bloomberg) -- Treasury 10-year notes rose, pushing the yield within two basis points of the lowest in more than 15 months, on speculation the Federal Reserve will signal it’s prepared to take further steps to spur economic growth. The extra yield investors demand to hold 30-year Treasuries instead of 10-year debt was near the widest on record as some traders bet that the Fed will announce a resumption of bond purchases. The U.S. is selling $34 billion of three-year notes today, part of a combined $74 billion of bond sales this week. “There’s still some scope for a downside move in yields if we get what the market is hoping for,” said David Schnautz, a fixed-income strategist at Commerzbank AG in London. “The rumor has already been the driving force and getting the fact might give us another mild push. We already have seen the big moves.” The benchmark 10-year yield dropped two basis points to 2.81 percent as of 7:06 a.m. in New York, according to BGCantor Market Data. It dropped yesterday to 2.80 percent, the lowest since April 21, 2009. The 3.5 percent security due in May 2020 rose 6/32, or $1.88 per $1,000 face amount, to 105 26/32. The two-year note yielded 0.53 percent. The rate fell to a record 0.4977 percent on Aug. 6. The spread between 10- and 30-year Treasuries was at 118 basis points, near the most since the Treasury began regularly scheduled sales of 30-year bonds in 1977. The difference between two- and 10-year yields was 2.28 percentage points. It dropped to 2.27 percentage points on July 1, the least since October 2. ‘Significant Possibility’ The U.S. economy faces “a significant possibility” of relapsing into a recession by 2012, according to a paper co- written by Oscar Jorda, a visiting scholar at the Fed Bank of San Francisco. “An unstable economic environment has rekindled talk of a double-dip recession,” Jorda, an economics professor at the University of California, Davis, and Travis Berge, a graduate student at the university, wrote in the note released yesterday. Speculation has been building that the Fed is moving toward a second round of debt purchases, known as quantitative easing, after economic reports cast doubt on the economy’s ability to recover. The Fed bought $300 billion of Treasuries between March and October 2009 to bring down borrowing costs. St. Louis Fed President James Bullard wrote in a paper last month that the central bank should resume purchases of Treasuries if the economy slows and prices fall. The Fed has maintained the benchmark interest rate at a range of zero to 0.25 percent since December 2008 to support the recovery. Fed Options “It is now almost a consensus view that the Fed will unveil some form of extended quantitative easing,” analysts including Steven Mansell, director of interest-rate strategy at Citigroup Global Markets Ltd. in London, wrote in a research note today. “A backup in yields on any disappointment is likely in our view.” Fed Chairman Ben S. Bernanke last month outlined three options for additional easing: strengthening the commitment to keep interest rates low, lowering the rate it pays on bank reserves and sustaining or expanding the amount of securities on the Fed’s balance sheet. Confidence among smaller U.S. firms slid to a four-month low in July and consumer prices excluding energy and food grew at a slower pace as the recovery cooled, reports this week will show, according to economists. Treasuries rallied last week after the Labor Department said non-farm U.S. payrolls fell more than economists forecast. Buffett Holdings The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices, narrowed two basis points to 1.77 percentage points. It was as high of 2.49 percentage points on Jan 11, the most this year. Warren Buffett shortened the duration of bonds held by his Berkshire Hathaway Inc. after saying deficit spending could force inflation higher. Twenty-one percent of holdings including Treasuries, municipal debt, foreign-government securities and corporate bonds were due in one year or less as of June 30, Omaha, Nebraska-based Berkshire said in a filing Aug. 6. That compares with 18 percent on March 31, and 16 percent at the end of last year’s second quarter. “It may be a sign that Buffett expects interest rates to start rising, maybe sooner than the conventional wisdom,” Meyer Shields, an analyst in Baltimore at Stifel Nicolaus & Co. who has a “sell” rating on Berkshire, said in an interview. Yield Outlook Buffett, who accumulated the world’s third-biggest personal fortune through decades of stock picks and takeovers, urged Congress last year to guard against inflation as the U.S. economy returned to growth. The 10-year yield will advance to 3.14 percent by year-end, according to a Bloomberg survey of banks and securities companies. The U.S. economy will grow 3.1 percent in 2010, versus a 2.6 percent contraction last year, the surveys show. The three-year notes scheduled for sale today yielded 0.83 percent in pre-auction trading, which would be a record low, according to data compiled by Bloomberg. President Barack Obama has increased the U.S.’s publicly traded debt to a record $8.18 trillion to sustain the expansion. This week’s total of 3-, 10- and 30-year sales is up from $69 billion when the same combination was auctioned in July. To contact the reporters on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net; Candice Zachariahs in Sydney at czachariahs2@bloomberg.net.

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