By Cordell Eddings and Susanne Walker Nov. 16 (Bloomberg) -- Treasuries rose as Federal Reserve Chairman Ben S. Bernanke reiterated that interest rates will remain near record lows for an “extended period.” Government securities gained as Bernanke said in a speech to the Economic Club of New York that economic “headwinds” of reduced bank lending and a weak labor market will probably restrain the pace of the U.S. economic recovery. Reports showed retail sales excluding autos rose less than forecast in October and a gauge of manufacturing in the New York region declined in November from the prior month. “Stronger language about an extended length of time for interest rates will cause Treasuries to rise,” said Jeffry Feigenwinter, head of Treasury trading in New York at primary dealer BNP Paribas Securities, before the speech. “The market expects that he will reiterate.” The yield on the 10-year security fell four basis points, or 0.04 percentage point, to 3.38 percent at 12:17 p.m. in New York. The 3.375 percent security maturing in November 2019 rose 11/32, or $3.44 per $1,000 face amount, to 99 31/32. Retail sales rose 1.4 percent last month, according to figures from the Commerce Department. The increase followed a 2.3 percent drop in September that was much larger than previously estimated. Excluding automobiles, retail sales rose 0.2 percent after a 0.4 percent gain in September. They were forecast to gain 0.4 percent, according to the survey median. ‘Continues to Disappoint’ “The consumer recovery continues to disappoint,” said Guy Lebas, chief fixed-income strategist and economist at Janney Montgomery Scott LLC in Philadelphia. “It’s been far slower than people have hoped because of a lessening demand and access to credit, which has provided a boon to bonds.” The Federal Reserve Bank of New York’s general economic index fell to 23.5 from 34.6, the highest since mid-2004, the bank said today. Readings above zero signal expansion in manufacturing. Economists forecast the gauge would decline to 30, according to the median projection 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 2- 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. Cost to Hedge 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. 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. 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 primary dealer 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 Fed. 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. ‘Off the Agenda’ “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.” 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. 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 reporters on this story: Cordell Eddings in New York at ceddings@bloomberg.netSusanne Walker in New York at swalker33@bloomberg.net.

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