By Anna Rascouet Nov. 16 (Bloomberg) -- U.S. 10-year Treasuries rose before a report that economists say will show the pace of manufacturing growth in the New York region slowed this month. The advance pushed the 10-year yield to its lowest level in almost two weeks. The Federal Reserve Bank of New York will say its general economic index fell to 30, from 34.6 in October, according to a Bloomberg survey. Investors are also buying U.S. bonds and selling out of Greece’s lower-rated debt after data last week showed the nation’s economy remained mired in recession, according to David Schnautz, a fixed-income strategist at Commerzbank AG in Frankfurt “Right now we are seeing a flight to quality in the bond market and this is feeding into Treasuries,” Schnautz said. “And if we see further slippage in the Empire Manufacturing, this should help Treasuries stabilize.” The yield on the 10-year security fell 3 basis points to 3.40 percent as of 10:02 a.m. in London today, after earlier slipping to 3.39 percent, the lowest level since Nov. 3. The 3.375 percent security maturing in November 2019 rose 7/32, or $2.19 per $1,000 face amount, to 99 27/32. Ten-year yields declined eight basis points last week. A basis point is 0.01 percentage point. The yield on two-year notes, the securities that are more sensitive to what the Federal Reserve does with interest rates, rose 2 basis points to 0.83 percent. Retail Sales A Commerce Department report today may say retail sales increased 0.9 percent, after dropping 1.5 percent during September, according to the median of 66 estimates in a Bloomberg News survey. Government efforts to snap the economic recession are raising speculation inflation will pick up as gross domestic product expands, leading investors to demand more yield to make longer-term loans. The central bank repeated its pledge on Nov. 4 to keep interest rates near zero for an “extended period.” The difference between two- and 10-year yields was 2.57 percentage points, more than doubling since late last year. Inflation, which erodes the value of a bond’s fixed payments, hasn’t been a problem in the U.S. so far. U.S. consumer costs fell 1.3 percent in September from a year earlier, according to the Labor Department. Joblessness at a 26-year high is helping curb increases in the cost of living, Labor Department reports may show this week. The consumer price index, due on Nov. 18, rose 0.2 percent in October for a second month, Bloomberg surveys show. Prices fell 0.3 percent from the year before, according to the surveys. Fund-Manager Survey A survey of investors by Ried, Thunberg & Co. shows fund managers turned less bearish on Treasuries. The company’s index measuring investors’ outlook on government debt through June rose to 41 for the seven days ended Nov. 13 from 39 the previous week. A reading below 50 shows investors expect prices to fall. The economic analysis company, based in Jersey City, New Jersey, surveyed 23 fund managers controlling $1.33 trillion. The options market shows investors are growing increasingly wary that U.S. debt sales may push yields higher even as inflation remains in check. The cost to hedge against rising yields on Treasuries as measured by the so-called skew in options on interest-rate swaps is at a record high, according to Barclays Plc data. At more than 37 basis points, the measure is almost 40 times higher than the average before credit markets seized up in August 2007. “Off the Agenda” The 13-member committee of bond dealers and investors that Treasury Secretary Timothy Geithner depends on for advice, and includes officials of Pacific Investment Management Co. and Goldman Sachs Group Inc., highlighted the surge on page 36 of a 67-page report on Nov. 3. On the same page, they showed inflation expectations are subdued based on gauges watched by the Federal Reserve. In their discussions, the group noted that a second year of government debt sales approaching $2 trillion may weigh on investors as the Fed stops buying notes and bonds. “The forward inflation rates show that inflation is off the agenda for the foreseeable future, with some still seeing a risk of deflation,” said Moorad Choudhry, head of Treasury in London at Europe Arab Bank Plc and author of more than a dozen books on finance and markets. “However, at the same time everyone is buying protection against higher yields.” Treasuries have handed investors a loss of 2.5 percent this year as the economy showed signs of reviving, according to indexes compiled by Bank of America’s Merrill Lynch unit. German bonds returned 1.7 percent, while Japan’s debt gained 0.3 percent, the indexes show. To contact the reporter on this story: Anna Rascouet in London arascouet@bloomberg.net.

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