Treasury 10-year yields were within 6 basis points of the lowest level since January 2009 before a report this week that economists said will show manufacturing activity slowed this month. Five-year yields were close to the least in two years after the Conference Board said consumer confidence dropped more than economists forecast, spurring expectations the Federal Reserve will take further measures to keep borrowing costs low. The U.S. is scheduled to auction $29 billion of seven-year debt today, the last of three note sales this week totaling $100 billion. “The environment is supportive for Treasuries,” said Orlando Green, assistant director of capital markets strategy at Credit Agricole Corporate & Investment Bank in London. “The possibility of further bond buying by the Federal Reserve is relatively high. The Fed will be ready to pull the trigger if there is evidence that the economy is moving to the downside.” The 10-year note yield was little changed at 2.47 percent as of 6:38 a.m. in New York, according to BGCantor Market Data. The 2.625 percent security due in August 2020 fell 1/32, or 31 cents per $1,000 face amount, to 101 10/32. The yield fell to 2.4158 percent on Aug. 25, the lowest since Jan. 21, 2009. The five-year yield was at 1.26 percent, after dropping to 1.22 percent yesterday, the least since Dec. 17, 2008. Treasuries have handed investors a return of 2.9 percent since the end of June, a third quarterly gain and the longest winning streak in two years, according to indexes compiled by Bank of America Corp.’s Merrill Lynch unit. Treasuries have returned 9 percent this year, the indexes show. Factory Index The Institute for Supply Management’s factory index fell to 54.5 in September from 56.3 in August, according to a Bloomberg survey before the Oct. 1 report. Orders placed at U.S. factories declined 0.3 percent in August following a 0.1 percent gain the previous month, according to a separate survey ahead of the figures to be released Oct. 4. The extra yield investors pay to hold 10-year notes over two-year debt shrank to 2.02 percentage points yesterday, the narrowest since Sept. 1, reflecting concern the U.S. economic recovery is stalling. “What’s going on further out the curve is a function of the idea that the Fed’s going to be out there buying,” said Ian Lyngen, a government bond strategist at CRT Capital Group LLC in Stamford, Connecticut. The Fed’s “going to continue to be a constant buyer in the Treasury market and presumably keep rates contained through that process,” he said. Five-Year Sale Treasuries rose yesterday as a $35 billion sale of five- year notes drew the lowest yield since the government began quarterly offerings of the securities in 1976. Notes also advanced as the Conference Board said its confidence index slid in September to 48.5, the lowest level since February. The median forecast of economists in a Bloomberg News survey was for a drop to 52.1. The Fed announced following its Sept. 21 meeting that it’s prepared to do more to help the economy, fueling speculation policy makers will add securities to the central bank’s holdings by increasing their Treasury purchases under a policy known as quantitative easing. The seven-year notes being sold today yielded 1.88 percent in pre-auction trading, compared with 1.989 percent at the previous auction of the securities on Aug. 26. Investors bid for 2.98 times the amount on offer last month, compared with an average of 2.84 for the past 10 sales. Indirect bidders, the category of investors that includes foreign central banks, bought 56.7 percent of the notes, versus the 10-sale average of 50 percent. “The seven-year note offers the biggest challenge of this week’s auctions, as it looks quite expensive on the yield curve,” Credit Agricole CIB’s Green said. Lower Than Forecast Yesterday’s sale of five-year notes produced a yield of 1.26 percent, compared with the 1.276 percent average forecast in a Bloomberg survey of eight of the 18 primary dealers obligated to participate in U.S. debt sales. “The market’s not trading on relative value,” said John Fath, a principal at BTG Pactual in New York. “When you’re buying five-year notes at 1.25, you’re thinking the Fed’s on hold for three or four years.” Fed Bank of Atlanta President Dennis Lockhart said the debate over whether policy makers should undertake a new round of asset purchases will “intensify” soon, and officials have the “will to act” as needed to support the flagging recovery. “In the coming weeks, monetary policy makers must come to grips with the question of whether there is anything they can do to improve the situation in the economy and, if so, what that action should be,” Lockhart said in the text of a speech yesterday in Sewanee, Tennessee. While declining to take a position, he said “this debate will intensify.” Futures on the CME Group exchange show a 31 percent chance the Fed will cut its target rate for overnight bank lending to zero by December, up from a 28 percent probability a month ago. The rate is currently in a range from zero to 0.25 percent. -- Editors: David Clarke, Peter Branton. To contact the reporters on this story: Keith Jenkins in London at Kjenkins3@bloomberg.net; Yasuhiko Seki in Tokyo at yseki5@bloomberg.net. To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

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