Sept. 24 (Bloomberg) -- Treasury yields were near the lowest level this week on speculation a government report today will show first-time claims for U.S. jobless benefits increased as rising unemployment tempers the economic recovery. Treasuries, little changed today, held gains from yesterday when the Federal Reserve said it will refrain from raising interest rates and indicated there is little chance that inflation will pick up. The U.S. government is scheduled to auction a record $29 billion of seven-year debt today, the last of three note sales this week. “The Fed will continue to keep rates low,” said Yasutoshi Nagai, Tokyo-based chief economist at Daiwa Securities SMBC Co., part of Japan’s second-largest brokerage. “There is no need to hike because unemployment is high and there is no concern about inflation.” The 10-year note yield fell two basis points to 3.41 percent as of 6:07 a.m. in London, according to BGCantor Market Data. The 3.625 percent security due in August 2019 rose 1/8, or $1.25 per $1,000 face amount, to 101 26/32. The yield declined to 3.40 percent yesterday, the lowest level since Sept. 18. Implied yields on Eurodollar futures contracts for March delivery dropped to 0.575 percent yesterday, the least since the contract was created in 2000. The yield was 0.595 percent today. The contracts, agreements to buy or sell assets at a later specific price and date, are a gauge of investor expectations for Fed interest rates because of their short maturity. The MSCI Asia Pacific Index of regional shares fell 0.3 percent, dropping for the first time in three days and helping increase demand for the relative safety of government debt. Jobless Claims A Labor Department report today will show the number of Americans seeking jobless benefits rose to 550,000 last week from 545,000 a week earlier, according to a Bloomberg News survey of economists. Unemployment at a 26-year high is helping keep the cost of living in check as the U.S. economy recovers. Benchmark 10-year notes rose for a second day yesterday after Fed officials said they will keep borrowing costs at a record low for an extended period. They cut the target rate for overnight loans between banks to a range of zero to 0.25 percent in December. Chairman Ben S. Bernanke and fellow policy makers indicated for the first time since August 2008 that the economy is accelerating, even as they recommitted keeping their benchmark interest rate “exceptionally low” for an “extended period.” “Substantial resource slack” and stable long-term inflation expectations mean that the policy committee “expects that inflation will remain subdued for some time,” policy makers said in their statement. Inflation erodes the value of a bond’s fixed payments. ‘Brighter Outlook’ The report gives “a brighter outlook that does not translate into greater fear of inflation,” economists at Goldman Sachs Group Inc. in New York led by Jan Hatzius wrote in a note to clients. Goldman Sachs is one of 18 primary dealers authorized to trade directly with the Fed. The difference between rates on 10-year notes and Treasury Inflation Protected Securities, which reflects the outlook among traders for consumer prices, was 1.81 percentage points, below the five-year average of 2.19 percentage points. The real yield, or what investors get from 10-year notes after inflation, was 4.91 percent, versus the five-year average of 1.39 percentage points. “The market was very concerned there would be a big debate about raising rates sooner than later, but the lack thereof is calming the market,” said Brian Edmonds, head of interest rates at Cantor Fitzgerald LP in New York, one of the primary dealers. Home Sales, Durables Reports on home sales and durable-goods orders today and tomorrow will add to signs the U.S. recession is abating, economists said. “There are some signs of recovery,” said Hidehiko Maejima, international bond strategist in Tokyo at BNP Paribas Securities Japan Ltd., the arm of another U.S. primary dealer. “Durable goods orders will improve and home sales will be very good.” Ten-year yields will be between 3.25 percent and 3.5 percent through month-end, he said. A Bloomberg survey of banks and securities companies projects the yield will rise to 3.6 percent by Dec. 31, with the most recent forecasts given the heaviest weightings. The global financial crisis started with the collapse of the U.S. property market in 2007 and has triggered $1.62 trillion of writedowns and credit losses at banks and other financial institutions, according to data compiled by Bloomberg. MBS Purchases The central bank will slow its purchases of mortgage securities, seeking to avoid disrupting the housing market as an economic recovery takes hold. Fed officials also signaled a stronger commitment to support housing markets, saying they would buy “a total of” $1.25 trillion in mortgage-backed securities. Last month, they said they could buy “up to” that total. Credit markets spreads are normalizing amid signs of an economic recovery. The Libor-OIS spread, a gauge of banks’ reluctance to lend, has narrowed to 11 basis points from as high as 3.64 percentage points in October. The TED spread, the difference between what banks and the U.S. Treasury pay to borrow for three months, dropped to 20 basis points from 1.35 percentage points at the end of last year. The seven-year notes scheduled for sale today yielded 3.07 percent in pre-auction trading, dropping from 3.092 percent at the previous sale of the securities on Aug. 27. Investors bid for 2.74 times the amount of debt on offer last month, versus an average of 2.55 times for the prior five auctions of this maturity. Indirect bidders, a class of investors that includes foreign central banks, bought 61.2 percent of the notes, compared with the five-sale average of 51.4 percent. Record Auction A record $40 billion five-year note sale yesterday drew a yield of 2.47 percent, compared with a forecast of 2.463 percent in a Bloomberg News survey of four primary dealers. Investors bid for 2.40 times the amount available, compared with an average of 2.23 at the last 10 auctions. Over the past three months, returns totaled 1 percent for two-year notes, 3.1 percent for seven-year debt and 2.7 percent for 10-year Treasuries, according to indexes compiled by Merrill Lynch & Co. To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.

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