The spread between two- and 30-year Treasury yields was near the widest level in five weeks before a U.S. report today that economists said will show the threat of deflation is waning. Long bonds headed for a fourth weekly loss as a Bloomberg News survey projected the Labor Department report will show the cost of living in the U.S. rose in August for a second month. Two-year yields were three basis points away from a record low on speculation the Bank of Japan will use proceeds from yen sales to buy short-maturity Treasuries. “The market is too pessimistic about the U.S. economy,” said Tsutomu Komiya, who handles U.S. government debt in Tokyo at Daiwa Asset Management Co., which has the equivalent of $100.3 billion in assets. “By the end of this year, that will change. Yields will rise.” Thirty-year bonds yielded 3.93 percent as of 6:01 a.m. in London, according to BGCantor Market Data. The 3.875 percent security due August 2040 traded at 98 31/32. The rate has climbed a quarter percentage point in four weeks. The two-year notes yielded 0.48 percent, compared with the low of 0.45 percent set Aug. 24. The two- to 30-year spread widened to as much as 3.45 percentage points today, the most since Aug. 10. MSCI’s Asia Pacific Index of shares climbed 1 percent, snapping a two-day decline and cutting demand for the relative safety of government debt. Consumer Prices The consumer-price index advanced 0.3 percent for a second month, according to the median forecast of economists surveyed by Bloomberg before the figure is released. A separate report today may show consumer confidence climbed in September. Wholesale costs rose in August for a second month, the Labor Department said yesterday, underscoring Fed Chairman Ben S. Bernanke’s view the risks from higher inflation or further disinflation are low. Inflation signs in the U.S. are mixed. Wal-Mart Stores Inc., the world’s largest retailer, has cut prices on cereal, detergent and other items to lure U.S. consumers as they struggle to recover from the worst recession since the 1930s. Gold futures, used by some investors as a hedge against rising consumer prices, climbed to a record high yesterday. TIPs The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices, widened to 1.80 percentage points from this year’s low of 1.47 percentage points in August. The figure has averaged 2.11 percentage points for the past five years. Deflation is a general drop in prices, while disinflation means a slowing of inflation. TIPS have returned 5.8 percent this year, versus 7.5 percent for conventional Treasuries, Bank of America Merrill Lynch indexes show. Both figures beat the MSCI World Index’s 1.1 percent gain in the period after accounting for reinvested dividends. Two-year notes outperformed longer securities this week amid speculation the Bank of Japan will use dollars acquired in its yen sales to buy the safest Treasuries, those with the shortest maturities. Japan said two days ago it sold yen for the first time since 2004 because the currency’s surge to a 15-year high versus the dollar imperiled the nation’s export-led recovery. Debt ‘Attractive’ Treasury-market optimists say the fact costs are in check makes government debt worth buying. “The U.S. market is attractive,” said Hiromasa Nakamura, who helps oversee the equivalent of $22.1 billion as a senior investor in Tokyo at Mizuho Asset Management Co. “There is no concern about inflation.” Mizuho’s next move in Treasuries will be to add longer maturity-debt, those that benefit most when yields fall, Nakamura said. Treasuries fell yesterday, pushing the 30-year yield to the highest level in a month, as reports on Philadelphia manufacturing and U.S. jobless claims damped speculation the Fed will announce an increase in its Treasury purchases, known as quantitative easing. The Federal Open Market Committee is scheduled to meet on Sept. 21. “The data does not seem to be deteriorating,” said Sergey Bondarchuk, an interest-rate strategist in New York at BNP Paribas SA, one of the 18 primary dealers that trade directly with the central bank. “The Fed may wait until the next meeting to engage in QE.” The Fed bought $1.379 billion of Treasuries that mature in 2012 and 2013 yesterday, part of a program to reinvest principal payments on its mortgage holdings into long-term government debt to prevent money from being drained out of the financial system. The central bank has purchased $22.9 billion of Treasuries since it began the program on Aug. 17. Benchmark 10-year yields will rise to 3 percent by year-end from today’s 2.76 percent, according to Barclays Capital Inc., another primary dealer. Daiwa’s Komiya has the same forecast. “With economic data stabilizing, the market seems to have revised its growth outlook upward,” Anshul Pradhan a debt strategist for Barclays in New York, wrote in a report yesterday. To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.

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