By Yasuhiko Seki Sept. 7 (Bloomberg) -- Treasuries advanced, pushing down 10-year yields from a one-month high, as speculation European governments and banks will struggle to raise funds boosted demand for the safety of U.S. government debt. Longer-maturity bonds led gains after the Association of German Banks said the nation’s 10 largest lenders may need about 105 billion euros ($135 billion) in fresh capital. Bonds also rose after former Federal Reserve Governor Donald Kohn told the New York Times that the Fed should take further steps to support the economy if the recovery slows. The Treasury will sell a total of $67 billion in 3-, 10- and 30-year debt this week. “Underlying uncertainties over the euro-zone’s banking system remain intact,” said Kazuaki Oh’e, executive director of fixed income, currencies and distribution in Tokyo at Canadian Imperial Bank of Commerce, the nation’s fifth-largest lender. “Government bonds and notes will draw close attention from investors seeking a hedging tool against downside risks.” The yield on the 10-year note declined three basis points, or 0.03 percentage point, to 2.67 percent as of 7:51 a.m. in London, according to BGCantor Market Data. The 2.625 percent security maturing in August 2020 rose 8/32, or $2.50 per $1,000 face amount, to 99 20/32. Benchmark yields reached 2.76 percent on Sept. 3, the highest since Aug. 10, and climbed 22 basis points in three days to Sept. 3 for the biggest gain since the period ended Dec. 22. Stress Tests Europe’s recent “stress tests” of major banks understated some lenders’ holdings of potentially risky government debt, the Wall Street Journal said, citing its own analysis. Some banks excluded certain nations’ debt from their totals, while others reduced amounts to account for short positions, according to the report published on the Journal’s website yesterday. Greek Prime Minister George Papandreou shuffled his cabinet and restructured ministries, a separate Wall Street Journal report said, citing George Petalotis, the leader’s spokesman. Treasuries have returned 7.7 percent in 2010 after losing 3.7 percent last year, according to Bank of America Merrill Lynch indexes, as investors sought the relative safety of U.S. debt amid Europe’s debt crisis. Fed Stimulus Former Fed Governor Donald Kohn said the Fed should consider more stimulus measures such as buying government bonds if warranted, the New York Times reported. Kohn said that real interest rates could start to rise should inflation expectations drop, and that the current economic rebound is likely to be slower than previous ones, according to the newspaper. Futures trading on the CME Group exchange showed a 73 percent chance the Fed will keep the target rate for overnight bank lending in a range of zero to 0.25 percent at its December meeting, up from a 68.3 percent probability one month ago. Gains in Treasuries were tempered on concern that President Barack Obama will boost spending to prevent a recession. Obama proposed yesterday spending at least $50 billion to rehabilitate the nation’s transportation infrastructure to help spur an economy that’s lost jobs for three straight months. Obama has increased U.S. publicly traded debt to a record $8.18 trillion. “Longer-maturity debt seem to be more vulnerable to the downside risk stemming from concerns over government finances,” said Akira Takei, a fund manager in Tokyo at Mizuho Asset Management Co., a unit of Japan’s second-largest bank. The extra yield investors demand to hold 10-year notes over two-year debt was 2.16 percentage points. It reached 2.24 percentage points on Sept. 3, the highest since Aug. 11. Debt Auctions The government will sell $33 billion in three-year notes today, $21 billion in 10-year debt tomorrow and $13 billion in 30-year bonds on Sept. 9. The total of $67 billion is the smallest combination of the maturities since July 2009. Three-year notes for sale today yielded 0.82 percent in pre-auction trading, data compiled by Bloomberg showed. The yield of 0.844 percent at the previous sale of the securities on Aug. 10 was a record low. Investors submitted bids for 3.31 times the amount of available debt last month, versus the average ratio of 3.1 this year. Indirect bidders, which include foreign central banks, bought 40.5 percent of the securities, versus the average of 46.5 percent this year. Investors “place low odds” on a double-dip recession, according to a weekly survey by Ried Thunberg ICAP, a unit of ICAP Plc, the world’s largest inter-dealer broker. Ried’s index on the outlook for Treasuries through December rose to 44 for the week ended Sept. 3 from 43 in the previous period. Figures less than 50 shows investors expect prices to fall. To contact the reporters on this story: Yasuhiko Seki in Tokyo at yseki5@bloomberg.net.

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