Treasuries rose as the Federal Reserve asked bond dealers how central bank asset purchases will influence yields, raising speculation policy makers will seek to keep inflation stable as they work to spur the economy. The New York Fed survey, obtained by Bloomberg News, asks about expectations for the size of any new program of debt purchases and the time over which it would be completed. Traders increased bets on inflation this week to a five-month high and Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said the Fed’s Treasury purchases are a “Ponzi scheme.” “The Fed is walking a tightrope,” said Hiroki Shimazu, an economist in Tokyo at Nikko Cordial Securities Inc., a unit of Sumitomo Mitsui Financial Group Inc., Japan’s third-largest publicly traded bank by assets. “It wants to spur growth and inflation -- but only moderate inflation.” Benchmark 10-year yields declined three basis points to 2.69 percent as of 6:43 a.m. in London, according to BGCantor Market Data. The 2.625 percent security due in August 2020 advanced 7/32, or $2.19 per $1,000 face amount, to 99 13/32. The gain snapped a six-day decline, the longest in two years. Fed policy makers said after their last meeting on Sept. 21 they were prepared to act to support the economy and increase prices. Debt investors have chimed in to say the central bank shouldn’t allow inflation, which erodes the value of bonds’ fixed payments, to accelerate too rapidly. Bull Market’s End Pimco’s Gross said a renewal of asset purchases will probably signify the end of a 30-year bull market in bonds. Fed “check-writing in the trillions is not a bondholder’s friend,” Gross wrote in his monthly outlook on Newport Beach, California-based Pimco’s website. “It is in fact inflationary, and, if truth be told, somewhat of a Ponzi scheme. It raises bond prices to create the illusion of high annual returns, but ultimately it reaches a dead end where those prices can no longer go up.” Ponzi schemes, named after Charles Ponzi who was charged with fraud in 1920, rely on new funds raised from investors to pay redemptions requested by previous investors. The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices, has widened to 2.15 percentage points from this year’s low of 1.47 percentage points in August. The five- year average is 2.10 percent. Boost Growth Ten-year Treasuries dropped yesterday as a report showing new-home sales rose more than forecast sparked speculation Fed debt purchases would be gradual. “They will release what they think is appropriate to boost economic growth while keeping inflation stable,” said Tomohisa Fujiki, a strategist in Tokyo at BNP Paribas SA, one of the 18 primary dealers required to bid at government debt sales. The central bank already reinvests the principal payments from its holdings of mortgage debt in U.S. government securities. It will buy due from April 2012 to March 2013 today as part of that program. Policy makers are scheduled to meet Nov. 2-3. The Treasury will sell $29 billion of seven-year debt today, the last of four note auctions this week. The securities yielded 2.07 percent in pre-auction trading, compared with the record low of 1.89 percent at the previous offering on Sept. 29. Bidding amounted to 3.04 times the amount available last month, compared with an average of 2.87 for the past 10 auctions. Indirect bidders purchased 50.2 percent of the securities. Japan Bonds Japan’s 10-year bonds rose for the first time in five days after the nation’s central bank said it will buy corporate debt with lower credit ratings as it tries to spur its own economy. The Bank of Japan said it will meet again next week after the Fed decides on possible additional debt purchases, adding to speculation Japanese officials will ease policy further. The yield on the 0.8 percent bond due September 2020 fell four basis points to 0.925 percent, according to Japan Bond Trading Co., the nation’s largest interdealer debt broker. Fed Bank of New York President William Dudley said yesterday the U.S. economy faces a slow rebound from the worst recession since the 1930s. “Even with our best efforts, the road to full recovery here in Upstate New York and across the nation is likely to be long and bumpy,” Dudley said in a speech in Buffalo, New York. “Unemployment remains much higher than we would like.” Dudley, who is also vice chairman of the policy-setting Federal Open Market Committee, repeated his view that the Fed will probably need to start a second round of unconventional monetary easing to combat too-low inflation and an unemployment rate that near 10 percent. Initial claims for jobless benefits rose to 455,000 last week from 452,000 the prior week, according to a Bloomberg News survey before the Labor Department reports the figure today. Claims have been above the 10-year average of 394,500 for all of 2009 and 2010. To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net. To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net.

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