By Susanne Walker Oct. 15 (Bloomberg) -- Treasuries fell for a second day as reports showed New York area manufacturing expanded for a third month and initial jobless claims fell, adding to signs the economy is recovering. The difference between 2- and 10-year notes widened to the most in more than a month. A separate report showed the cost of living in the U.S. rose at a slower pace in September, showing inflation will not be a threat as the economy emerges from the worst slump since the Great Depression. “The data is a little better than people expected and the tone is changing somewhat,” said Thomas Roth, head of U.S. government bond trading in New York at Dresdner Kleinwort. “For about a month we had a one directional trade where prices went higher and people lost confidence in the economy. Now we’re having a correction of that.” The yield on the 10-year note rose five basis points, or 0.05 percentage point, to 3.46 percent at 9:09 a.m. in New York, according to BGCantor Market Data. The 3.625 percent security due August 2019 fell 14/32, or $4.38 per $1,000 face amount, to 101 1/4. The difference between yields on 2- and 10-year securities touched 2.53 percentage points, the most since Sept. 9. Key support for the 10-year note yield lies at 3.5 percent, “which is where we saw spirited dip-buying from Aug. 25 through Sept. 23,” William O’Donnell, U.S. government bond strategist at RBS Securities Inc. in Stamford, Connecticut, wrote in a note to clients. Support refers to areas where buy and sell orders are clustered. Dip-buying refers to an uptick in yields, which attracts buyers. RBS is one of the 18 primary dealers that trade with the Federal Reserve. General Economic Index The Federal Reserve Bank of New York’s general economic index soared to 34.6, the highest since mid-2004, from 18.9 in September, the bank said today, marking the first time the measure has shown expansion for at least three months since a period ending in January 2008. The cost of living rose 0.2 percent in September, as forecast. The number of Americans filing first-time claims for unemployment benefits dropped by 10,000 to 514,000 last week, lower than forecast. “The data is a little bit tilted toward being bearish for bonds,” said James Combias, New York-based head of Treasury trading at primary dealer Mizuho Securities USA Inc. “It’s the same trajectory. We are still losing jobs and it’s not significantly better but it’s not getting worse.” The difference between rates on 10-year notes and TIPS, which reflects the outlook among traders for consumer prices, was at 1.97 percentage points, the most in more than two months. The spread has averaged 2.18 percentage points over the last five years. Goldman Earnings U.S. debt pared losses earlier after profit at Goldman Sachs Group Inc. was less than some investors anticipated. Net income more than doubled at Goldman to $3.19 billion, or $5.25 per share, in the three months ended Sept. 25, from $845 million, or $1.81 a share, in last year’s third quarter, the New York-based company said today in a statement. Minutes of the Federal Reserve’s September meeting released yesterday showed many policy makers raised their second-half economic projections based on improved housing markets, stabilizing consumer spending and a recovery in growth outside the U.S. Be Prepared “Despite these positive factors, many participants noted that the economic recovery was likely to be quite restrained,” the minutes said. “Credit from banks remained difficult to obtain and costly for many borrowers; these conditions were expected to improve only gradually.” Chairman Ben S. Bernanke said last week the Fed will be prepared to tighten credit when the economic outlook “has improved sufficiently.” The minutes show Fed officials weighing the risks of an anemic recovery where unused capacity leads to “subdued and potentially declining wage and price inflation.” The Fed will hold off raising rates until its August 2010 meeting, according to a Bloomberg survey of economists. ‘Government’s Check’ 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. 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. Ten-year Treasuries offer a real yield, or what investors get after accounting for the cost of living, of 4.92 percent. The figure was 5.95 percent in August, versus the five-year average of 1.42 percent. 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: Susanne Walker in New York at swalker33@bloomberg.net.

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