Nov. 2 (Bloomberg) -- Treasuries fell, extending October’s decline, as economists said an industry report today will show that U.S. manufacturing expanded last month at the fastest pace since 2006. Investors should drop bets on two-year notes because the yields are too low, said J.P. Morgan Securities Inc., one of the 18 primary dealers that are required to bid at the government debt sales, in a report. Money managers expect Treasury prices to fall by year-end, based on a survey by Ried, Thunberg & Co., an economic advisory company in Jersey City, New Jersey. “I don’t really find good value” in Treasuries, said Roger Bridges, head of bonds who oversees the equivalent of about $10.8 billion of debt at Tyndall Investment Management Ltd. in Sydney, part of Australia’s third-largest insurer. “You’d probably be looking to sell.” The 10-year note yield rose three basis points to 3.41 percent as of 6:26 a.m. in London, according to BGCantor Market Data. The 3.625 percent security maturing in August 2019 fell 7/32, or $2.19 per $1,000 face amount, to 101 25/32. Bridges said he’s considering selling from his holdings of Treasury futures contracts. The Tempe, Arizona-based Institute for Supply Management will say today that its manufacturing index climbed to 53 in October, the highest level since August 2006, according to the median forecast in a Bloomberg News survey of economists. Government securities handed investors a loss of 0.06 percent in October, snapping a three-month gain, according to Merrill Lynch & Co.’s U.S. Treasury Master index. Notes slid as the economy began to revive from the steepest recession since the 1930s and the government sold record amounts of debt. 2-Year Yields Two-year yields climbed three basis points, or 0.03 percentage point, to 0.92 percent. They were as low as 0.89 percent, a level not seen in almost three weeks. Those rates are 67 basis points more than the upper end of the Federal Reserve’s target range for overnight loans between banks, falling from this year’s high of 1.15 percentage points in June. Investors should “unwind” bets on two-year notes, J.P. Morgan fixed-income analysts led by Srini Ramaswamy in New York wrote in a report Oct. 30. Two-year yields are below their six- month average of about 1 percent, they said in the report. Ten-year rates will climb to 4 percent and two-year yields will advance to 1.25 percent by the end of June, according to the report. A Bloomberg survey of economists projects the figures will be 3.84 percent and 1.68 percent, with the most recent estimates given the heaviest weightings. Treasuries rallied on Oct. 30, trimming last month’s loss and pushing yields down, as declines in U.S. stocks spurred demand for the relative safety of government debt. Equities Rout The Standard & Poor’s 500 Index dropped 2.8 percent, the most since the start of October. The MSCI Asia Pacific Index of regional shares declined 1.3 percent today, adding to a 1.3 percent slide in October. U.S. stock index futures rose today. Ried Thunberg’s index measuring investors’ outlook for Treasuries through year-end declined to 43 for the seven days through Oct. 30 from 44 for the previous week. A reading below 50 shows investors expect prices to fall. The economic analysis company, based in Jersey City, New Jersey, surveyed 24 fund managers controlling $1.4 trillion. Yields on 10-year Treasuries advanced eight basis points in October as investors bet the Federal Reserve will begin to signal an increase in interest rates from record lows after the economy showed signs of growth. The U.S. economy expanded 3.5 percent in the third quarter, after shrinking for a year, the Commerce Department reported on Oct. 29. Treasury Bulls Growth will moderate this quarter, a Bloomberg survey of economists shows, giving Treasury bulls reason to buy. “The recovery is very weak,” said Hideo Shimomura, who helps oversee about $55.4 billion in Tokyo as chief fund investor at Mitsubishi UFJ Asset Management Co., part of Japan’s largest bank. Ten-year yields will fall to 3 percent by year-end, he said. The collapse of the U.S. property market in 2007 triggered $1.66 trillion of writedowns and credit losses at banks and other financial institutions and sent the global economy into its first recession since World War II, according to data compiled by Bloomberg. CIT Group Inc., a 101-year-old commercial lender, filed for bankruptcy yesterday in the U.S. The Fed cut its benchmark rate to a range of zero to 0.25 percent in December and arranged programs to purchase Treasuries and mortgage-backed securities to cap consumer borrowing costs. U.S. 30-year fixed mortgage rates have fallen to 5.16 percent from this year’s high of 5.74 percent in June, according to Bankrate.com in North Palm Beach, Florida. Banks Buying U.S. banks are buying Treasuries at the fastest pace since just after the last recession as demand for loans declines. Combined purchases of Treasuries and bonds issued by government-chartered companies such as Fannie Mae rose 18 percent to $1.4 trillion in the 52 weeks through mid-October. Commercial and industrial loans have fallen 17 percent from a record high a year ago to 1.37 trillion as of Oct. 21, an unprecedented drop. Banks including JPMorgan Chase & Co., Citigroup Inc. and Wells Fargo & Co. are profiting from a steepening yield curve, buying longer-term Treasuries with money acquired at short-term rates kept low by the Fed’s near-zero benchmark. The difference between two- and 10-year yields widened to 2.49 percentage points from 1.23 percentage points at the end of last year. Risk Averse “Banks will continue to purchase Treasuries for the next several quarters, at least until the end of 2010, as they continue to be reasonably risk averse,” said Ira Jersey, an interest-rate strategist in New York at RBC Capital Markets, as a primary dealer. The demand will help keep 10-year yields below 4 percent through 2010, he said. Thirty-year bonds fell last month as investors bet the Treasury will increase long-term debt sales before borrowing costs rise. President Barack Obama has increased the public debt to a record $7.01 trillion as he borrows unprecedented amounts to fund economic-stimulus plans. The figure is equivalent to almost half of the $14.2 trillion economy, according to data compiled by Bloomberg. Sales of coupon-bearing Treasuries will increase to $2.38 trillion in the fiscal year that began Oct. 1, from $1.81 trillion in the prior 12 months, primary dealer Goldman Sachs Group Inc. said in a report on Oct. 20. To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.

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