Treasury 10-year notes rose for the third time in four days as signs global economic growth is slowing increased the refuge appeal of government debt. Two-year note yields were close to a record low before reports this week forecast to show U.S. home sales fell, Japanese export growth slowed and German business sentiment weakened. Treasuries have returned 8 percent in 2010 after losing 3.7 percent last year, according to Bank of America Merrill Lynch indexes, as investors sought safety. “The anxiety about the outlook for the global economy lingers, encouraging a flight to safer assets such as government debt,” said Koji Takeuchi, senior economist in Tokyo at Mizuho Research Institute Ltd., a unit of Japan’s second-largest banking group. “Bond yields will stay low, while riskier assets will remain hostage to downside risks.” The 10-year note yield dropped one basis point to 2.61 percent as of 6:43 a.m. in London, according to BGCantor Market Data. The 2.625 percent security due in August 2020 rose 3/32, or $0.94 per $1,000 face amount, to 100 4/32. The yield touched 2.53 percent on Aug. 20, the lowest since March 2009. Rates on two-year notes were little changed at 0.49 percent after reaching a record low of 0.4547 percent on Aug. 20. Existing Home Sales Purchases of existing U.S. homes fell 12.9 percent in July, after declining 5.1 percent in May, economists said in a Bloomberg News survey before tomorrow’s report. Japan’s export growth slowed to 21.8 percent in July from 27.7 percent the prior month, and the Ifo institute’s German business climate index dropped to 105.7 in August from 106.2 the previous month, separate surveys showed ahead of the Aug. 25 reports. Signs of a global slowdown pushed the yield on Japan’s benchmark 10-year bond down to 0.9 percent on Aug. 18, the lowest since August 2003. The yield on Germany’s 30-year bond fell to a record low on Aug. 20. European Central Bank council member Axel Weber said last week the central bank may need to keep emergency measures in place through year-end. “With U.S. and ECB officials pushing for additional stimulus and quantitative easing if needed, the green light remains for the underlying bid despite the extreme run,” John Spinello, chief technical strategist in New York at primary dealer Jefferies Group Inc., wrote in a note to clients. Auctions, Curve Treasuries rose as the U.S. prepares to sell $102 billion of two-, five- and seven-year notes this week, the smallest monthly offering of that combination of debt since May 2009. The Federal Reserve will purchase about $18 billion of U.S. debt by the middle of September using the money from principal payments on its holdings of agency debt and agency mortgage- backed securities, according to its website. The central bank plans to buy notes due from 2013 to 2014 on Aug. 24 and debt maturing from 2021 to 2040 on Aug. 26. The yield curve is at its flattest in almost a year on speculation that investors will buy longer-dated securities, according to Tomohisa Fujiki , an interest-rate strategist in Tokyo at BNP Paribas SA. “It is normal for investors to gradually extend the target of buying from shorter-dated securities to longer ones, after having sent yields on shorter-dated notes to levels that reflect the monetary policy outlook,” Fujiki said. The spread between yields on 2- and 30-year debt shrank to about 3.16 percentage points, the lowest since October 2009. Futures trading on the CME Group exchange showed a 63.4 percent chance the Fed will maintain the target rate for overnight bank lending by its March meeting, up a from a 59.1 percent probability one month ago. Morgan Stanley Morgan Stanley, the most bearish of the 18 primary dealers that trade with the Fed, said its forecast that Treasury yields would rise this year was misguided. “We got our rates call wrong and missed a great opportunity to be long bonds this year,” James Caron, head of U.S. interest-rate strategy at Morgan Stanley in New York, wrote in a note to clients. “The market is currently rife with tactical relative value opportunities and that’s what we will focus on going forward.” Morgan Stanley had forecast that a strengthening U.S. economy would lead to private credit demand, higher stock prices and diminish the refuge appeal of Treasuries, pushing yields higher. In December, the firm said that that yields on benchmark 10-year notes would climb about 40 percent to 5.5 percent, the biggest annual increase since 1999. To contact the reporters on this story: Yasuhiko Seki in Tokyo at yseki5@bloomberg.net

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