Treasuries fell for a third day after China reported manufacturing improved and as economists said U.S. data today will show growth at factories. Corporate bonds beat Treasuries for a third month in February as the world’s biggest economy showed signs of strengthening. An index of sovereign securities has returned 0.7 percent since the end of November, versus 5.6 percent for a gauge of investment-grade and high-yield company debt, according to Bank of America Merrill Lynch data. Italian Prime Minister Mario Monti indicated the worst may be over for the euro region’s most distressed bonds. “Strong economic data will prevail, and the European situation seems to be under control,� said Ali Jalai, a Treasuries trader in Singapore at Scotiabank, a unit of Bank of Nova Scotia (BNS), one of the 21 primary dealers that underwrite the U.S. debt. “Yields will go up,� as long as the pace of improvement in jobs and economic growth holds, he said. U.S. 10-year rates climbed two basis points, or 0.02 percentage point, to 1.99 percent as of 6:47 a.m. in Tokyo, according to Bloomberg Bond Trader prices. The 2 percent security maturing in February 2022 fell 1/8, or $1.25 per $1,000 face amount, to 100 1/8. Yields will rise to 2.25 percent by June 30, Jalai said. Japan’s 10-year rate was little changed at 0.95 percent. The nation’s government debt market returned 0.1 percent in February, the Bank of America indexes show. China’s purchasing managers’ index rose to 51.0 in February from 50.5 in January, the statistics bureau and logistics federation said today. ISM Data The Institute for Supply Management’s index of U.S. factory activity probably climbed in February to an eight-month high of 54.5, according to the median estimate of 78 economists surveyed by Bloomberg News. Consumer purchases probably rose 0.4 percent in January, the biggest gain in four months, a separate survey showed before the Commerce Department releases the data today. Italy’s Monti said he expects European leaders to reach agreement by the end of the month on expanding a debt-crisis firewall. While German Chancellor Angela Merkel has expressed reluctance to discuss increasing the size of Europe’s bailout fund at a European Union summit in Brussels beginning today, Monti said yesterday he’s “confident� a deal will come. Bernanke’s Testimony Treasuries fell yesterday as comments from Federal Reserve Chairman Ben S. Bernanke to lawmakers damped speculation the central bank will expand its economic stimulus through a third round of debt purchases. Bernanke said inflation will probably “remain subdued.� The Fed’s bond buying program, combined with demand for the relative safety of U.S. debt spurred by Europe’s fiscal crisis, is keeping 10-year yields within 32 basis points of the record low. The central bank is replacing $400 billion of shorter- maturity Treasuries in its holdings with longer-term debt to cap long-term borrowing costs. It’s scheduled to sell as much as $8.75 billion of notes due from June 2012 to January 2013 today. While the U.S. jobless rate has fallen to the least since February 2009, some investors are focused on Greece’s struggle to avoid default, oil costs that have passed $100 a barrel and American home prices that have dropped to the lowest level since 2003. ‘Enough’ Global Concerns “There are enough worries out there globally and that will give an underlying bid to the Treasury market,� said Russell Jones, the Sydney-based global head of debt strategy at Westpac Banking Corp. (WBC), Australia’s second-largest lender. Yields on 10-year Treasuries will drop to a record 1.5 percent over the next three months, he said. Fed policy makers have a target of 2 percent for cost increases in the economy, based on the personal consumption expenditures index. The gauge probably rose 2.3 percent in the 12 months ending Jan. 31, slowing from 2.4 percent in the year ended Dec. 31, according to the median forecast of economists surveyed by Bloomberg News before the government issues the figure today. The measure increased 1.8 percent after taking out food and energy costs, unchanged from December’s rate, a separate survey shows. A gauge of trader expectations for inflation that is tracked by the Fed is at 2.42 percent, compared with this year’s high of 2.60 percent. The five-year, five-year forward breakeven rate, which projects annualized price increases over a five-year period starting in 2017, is below its 2.76 percent average over the past decade. TIPS Spread The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the debt, was 2.27 percentage points. The decade-long average is 2.14 percentage points. Five-year inflation swaps, which allow investors to exchange fixed-interest rates for returns equivalent to the consumer price index, declined to 2.40 percent from 2.50 a week ago. The economy will improve and may prompt policy makers to raise the benchmark rate “sooner than people expect,� Fed Bank of Philadelphia President Charles Plosser said yesterday on CNBC. To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net; Candice Zachariahs in Sydney at czachariahs2@bloomberg.net To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net.

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