Treasury 10-year yields fell to their lowest level in more than 16 months as a report showed manufacturing in the New York region expanded less than forecast in August. Two-year rates were 2 basis points away from a record low as the Federal Reserve prepared to buy Treasuries this week as part of its plan to spur the slowing economy by keeping borrowing costs low. The central bank will purchase notes due from 2014 to 2016 tomorrow and debt due in 2016 to 2020 on Aug. 19, according to the Fed Bank of New York’s website. A government report may show global purchases of U.S. financial assets increased in June. “We need to see a broad based turnaround in the economy at this point to reverse the sentiment in the market,” said Christian Cooper, senior rates trader in New York at Jefferies & Co., one of the 18 primary dealers that trade with the Federal Reserve. “We are entering an environment where every piece of data matters. We could get to 2.5 percent on the 10-year in short order.” Benchmark 10-year note yields fell 5 basis points to 2.62 percent at 8:34 a.m. in New York, according to BGCantor Market Data. They dropped as low as 2.60 percent, the least since March 2009, generic data compiled by Bloomberg show. The 2.625 security due in August 2020 rose 13/32 or $4.06 per $1,000 face amount, to 100 1/32. Two-year debt yielded 0.51 percent, versus the record of 0.4892 percent set Aug. 11. The 30-year yield slid as low as 3.78 percent. Thirty-year yields fell to the lowest level since April 2009. Yield Gap The difference in yield, or spread, between 10-year and 30- year Treasuries narrowed for the fourth-straight day after reaching 128 basis points on Aug. 10, the most since at least 1991. The Federal Reserve Bank of New York’s general economic index rose to 7.1 from 5.1 in July. The manufacturing index was forecast to expand to 8.3. Readings greater than zero signal expansion. Builders in the U.S. turned less pessimistic in August, a separate survey showed before a report from the National Association of Home Builders/Wells Fargo. The confidence index rose to 15 from 14 in July, the median of 39 economists estimates showed. Readings lower than 50 mean more respondents said conditions were poor. Investors in a weekly survey by Ried Thunberg ICAP, a unit of ICAP Plc, the world’s largest inter-dealer broker, stuck to their bearish outlook following the market rally, the company said. Ried’s index on the outlook for Treasuries through December was unchanged at 44 for the seven days ended Aug. 13 versus the week before. A figure less than 50 shows investors expect prices to fall. Treasury Returns Treasuries have returned 7.6 percent this year, according to indexes compiled by Bank of America Merrill Lynch, as investors sought the relative safety of debt while equities tumbled. MSCI’s World Index of shares has fallen 4.1 percent in 2010, including reinvested dividends. International investors bought $45.7 billion more long-term U.S. notes, bonds and stocks than they sold in June, rising from $35.4 billion in May, according to a Bloomberg News survey of economists before the Treasury Department report today. Money managers are moving more money than ever out of stocks and into bonds. About $185 billion was sent to bond funds through July 31, the most on record, according to the Investment Company Institute. ‘More Modest’ “The pace of economic recovery is likely to be more modest in the near term than had been anticipated,” the Fed said Aug. 10. It announced it will invest the principal payments from its holdings of mortgage-backed securities into longer-term Treasury securities in the same statement. The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices, narrowed to 1.62 percentage points, the lowest since September. Japan’s economy grew at less than a fifth of the pace last quarter than economists estimated, a government report showed, pushing the nation into third place behind the U.S. and China. Japanese 10-year bond yields dropped as low as 0.95 percent, the least since 2003, according to Japan Bond Trading Co., the nation’s largest interdealer debt broker. Fewer Options Bond investors seeking top-rated securities face fewer alternatives to Treasuries, allowing President Barack Obama to sell unprecedented sums of debt at ever lower rates to finance a $1.47 trillion deficit. While net issuance of Treasuries will rise by $1.2 trillion this year, the net supply of corporate bonds, mortgage-backed securities and debt tied to consumer loans may recede by $1.3 trillion, according to Jeffrey Rosenberg, a fixed-income strategist at Bank of America Corp. in New York. The company is among the primary dealers that are required to bid at the government’s debt sales. Shrinking credit markets help explain why some Treasury yields are at record lows even after the amount of marketable government debt outstanding increased by 21 percent from a year earlier to $8.18 trillion. “The number-one fixed-income conundrum is ‘Where do I go?’” said Mitchell Stapley, the chief fixed-income officer for Fifth Third Asset Management, who oversees $22 billion in assets. In credit markets, “the supply of sleep-at-night- quality bonds has just collapsed,” he said in an interview from Grand Rapids, Michigan.

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