Treasuries headed for their steepest weekly loss in five months after Greece staved off defaulting on its debt, bolstering expectations that economic growth will pick up and boosting demand for riskier assets. Traders added to bets on U.S. inflation for a seventh day, the longest streak since March 2010. The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of expectations for consumer prices over the next decade, widened to 2.39 percentage points from this year’s low of 2.14 percentage points set last month. Stocks rose. “Treasuries are heading lower from extended safe-haven levels,” said David Schnautz, a fixed-income strategist at Commerzbank AG in London. “The key driver has been the relief that Greece has avoided some stumbling blocks and reduced the imminent threat of default. That’s helped the risk-on mood.” Ten-year yields were little changed at 3.17 percent as of 6:45 a.m. in New York, according to Bloomberg Bond Trader prices. The 3.125 percent note maturing in May 2021 traded at 99 19/32. The yield climbed 31 basis points this week, the biggest increase since the period ended Feb. 4. The two-year note yield was at 0.46 percent. Two-year rates advanced 13 basis points this week, less than 10-year yields because they are more influenced by the Federal Reserve’s target for overnight bank lending. That’s the first weekly rise since the week ended April 8. The central bank has kept the target in a range of zero to 0.25 percent since December 2008. Stocks Rise The difference between two- and 10-year yields expanded to 2.71 percentage points, the widest in two months. The MSCI AC Asia Pacific (MXAP) Index of stocks rose for a fourth straight day, gaining 0.5 percent. Japan’s Nikkei 225 (NKY) Stock Average index also added 0.5 percent. Treasuries handed investors a 2.4 percent return in the quarter ended yesterday, after losing 0.14 percent in the previous quarter, based on indexes compiled by Bank of America Merrill Lynch. President Barack Obama is trying to reach a compromise with opposition Republican lawmakers who are seeking spending cuts before they agree to raise the nation’s borrowing limit, currently capped at $14.3 trillion. The Treasury has said it has until Aug. 2 before its ability to pay the U.S. debt expires. Treasury Secretary Timothy F. Geithner has signaled to White House officials that he’s considering leaving the administration after Obama reaches an agreement with Congress to raise the debt ceiling, according to three people familiar with the matter. Japanese Bonds Japan’s 10-year rates rose 3.5 basis points this week to 1.14 percent, the biggest increase in almost three months. Nationwide consumer prices rose, unemployment fell, and companies forecast increased hiring and investment in the Tankan survey, government and central-bank reports today showed. U.S. 10-year rates climbed to 2.04 percentage points more than their Japanese counterparts yesterday, the biggest spread in seven weeks. Greek Prime Minister George Papandreou’s drive to stave off the euro area’s first sovereign default stayed on track after lawmakers this week backed government austerity plans required to obtain rescue aid. “The risk that Greece will default in the short term is gone,” said Takuya Yamamoto, who helps oversee the equivalent of $118.4 billion as a portfolio manager in Tokyo at Diam Co., a unit of Japan’s second-biggest life insurer. “The U.S. economy will move past this soft patch and gradually recover.” ‘Another Hurdle’ The MSCI All Country World Index of stocks returned 4.35 percent this week, after accounting for reinvested dividends, according to data compiled by Bloomberg. An index of U.S. high-yield bonds gained 0.58 percent as of yesterday, while Treasuries have handed investors a loss of 1.28 percent, based on Bank of America Merrill Lynch data. The threat of a Greek default had raised concern that European economic growth would slow and drag down the pace of the global expansion. “It’s another hurdle that’s been crossed,” said Chris Ahrens, head U.S. rates strategist in Stamford, Connecticut, at UBS AG, a primary dealer. “The better performance of risk assets is weighing on Treasuries.” U.S. manufacturing growth slowed and consumer sentiment fell in June, economists said before two industry reports today. The slowdown at factories, tied to the March earthquake in Japan, may reverse as supplies and auto components flow from the Asian nation’s factories to the U.S., said economists including Sal Guatieri at BMO Capital Markets in Toronto. Bond Purchases Treasuries also fell this week as the Fed yesterday completed its $600 billion bond-purchase program, which was aimed at capping borrowing costs. “Who will buy them now?” Bill Gross, manager of the world’s biggest bond fund at Pacific Investment Management Company, said in a Twitter posting yesterday. Gross, who is based in Newport Beach, California, had 5 percent of his fund’s assets in Treasuries and 35 percent in money-market securities at the end of May, according to Pimco’s website. The 10-year yield will climb to 3.64 percent by year-end, according to a Bloomberg survey of financial companies with the most recent forecasts given the heaviest weightings. To contact the reporters on this story: Keith Jenkins in London at kjenkins3@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

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