By Matthew Brown and Theresa Barraclough Oct. 15 (Bloomberg) -- Treasuries fell for a second day as stocks extended a global rally and before reports that may show manufacturing in New York and Philadelphia expanded. Ten-year notes led declines, pushing the yield up to the highest level in three weeks. The MSCI World Index of shares rose for a second day before earnings reports from Goldman Sachs Group Inc., the biggest U.S. securities firm before converting to a bank last year, and Citigroup Inc. JPMorgan Chase & Co. yesterday posted third-quarter profit that topped estimates. “Upward data signs from the U.S. combined with decent earnings in the financial sector have provided a strong bid for equity markets and that’s weighing on bonds,”,” said Nick Stamenkovic, a fixed-income strategist in Edinburgh at RIA Capital Markets Ltd., a broker for banks and investors. The yield on the 10-year note rose 3 basis points, or 0.03 percentage point, to 3.44 percent as of 6:20 a.m. in New York, according to BGCantor Market Data. The yield earlier rose to 3.46 percent, the highest since Sept. 23. The 3.625 percent security due August 2019 fell 8/32, or $2.50 per $1,000 face amount, to 101 17/32. The difference between yields on two- and 10-year securities was at 2.50 percentage points, the highest in four weeks. Demand for debt waned as the MSCI World Index climbed 0.3 percent and the Dow Jones Stoxx 600 Index of European shares added 0.5 percent. The Dow Jones Industrial Average rose above 10,000 for the first time in a year yesterday after JPMorgan posted earnings of 82 cents per share, compared with the average analyst estimate of 51 cents in a Bloomberg survey. Goldman Earnings Goldman Sachs third-quarter net income will almost triple to $2.54 billion while Citigroup’s loss will narrow to $2.55 billion, according Bloomberg analyst estimates. The Fed Bank of New York’s Empire State manufacturing index eased to 17.3 in October from an almost two-year high of 18.9 the prior month, according to a Bloomberg survey. A separate report from the Philadelphia Fed will show its factory gauge fell to 12 from 14.1, a separate survey forecast. Positive readings signal expansion. Treasury bulls say yields are likely to fall before a government report today economists said will show consumer prices rose at a slower pace in September, backing the case for the Federal Reserve to keep interest rates low. “The Fed should be worried about deflation,” said Akira Takei, a manager in the international bond investment department in Tokyo at Mizuho Asset Management Co., a unit of Japan’s second-largest bank. “Any Fed rate increases are far far away. I don’t see yields rising further from the current level.” Cost of Living The cost of living in the U.S. rose 0.2 percent after increasing 0.4 percent in August, according to the median forecast in a Bloomberg News survey. Economists estimate the government report today will show the cost of living is down 1.4 percent over the past 12 months. Fed Vice Chairman Donald Kohn this week said inflation and growth will probably stay below the Fed’s objectives for some time, warranting low rates for an “extended period.” His concerns echoed those of New York Fed President William Dudley. The Fed will hold off raising rates until its August 2010 meeting, according to a Bloomberg survey of economists. Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., bought government debt last month and cut mortgage bond holdings to the lowest level since 2005 after he warned this year that the U.S. recession will lead to a period of less-than-average growth. ‘Government’s Check’ Gross boosted the $185.7 billion Total Return Fund’s investment in Treasuries, so-called agency debt and other government-linked bonds to 48 percent of assets in September from 44 percent in August, according to Pimco’s Web site. The holdings are the most since August 2004. “We’ve exchanged our mortgages for the government’s check,” Gross, who is based in Newport Beach, California, said in an interview last month. He said he was buying longer- maturity Treasuries because of a deflation concerns. U.S. Treasuries lost investors 0.4 percent this month, compared with a 0.1 percent loss for German government bonds and a 0.3 percent return for U.K. gilts, according to Merrill Lynch & Co. indexes. To contact the reporter on this story: Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net; Matthew Brown in London at mbrown42@bloomberg.net

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