By Theresa Barraclough Dec. 10 (Bloomberg) -- Treasuries advanced for a third time in the past four days on speculation other European nations will be downgraded after Standard & Poor’s yesterday cut its outlook on Spain’s debt. The downgrade came after Fitch Ratings cut Greece’s credit rating one step to BBB+, the third-lowest investment grade on Dec. 8. Demand for Treasuries also increased this month as Dubai announced plans to delay its debt payment. Ten-year Treasury yields are likely to drop over 60 basis points to 2.75 percent by the end of the year, according to Mizuho Asset Management Co., a unit of Japan’s second-largest bank. “Any credit concern can trigger a flight to quality,” said Akira Takei, a manager in the international bond investment department in Tokyo at Mizuho Asset. “The trigger could be financial dislocation in Dubai or Greece. Investors are vulnerable to bad news.” The yield on the benchmark 10-year note fell two basis points, or 0.02 percentage point, to 3.41 percent as of 6:02 a.m. in London, according to data compiled by Bloomberg. The 3.375 percent security due November 2019 rose 5/32, or $1.56 cents per $1,000 face amount, to 99 21/32. Should yields fall to 2.75 percent by year-end, as predicted by Takei, investors who buy the debt today would make a 5.9 percent return, Bloomberg calculations show. ‘Uneasiness About Credit’ “Global uneasiness about credit is increasing,” said Mitsushige Akino, who oversees the equivalent of $450 million in assets in Tokyo at Ichiyoshi Investment Management Co. “People are becoming more sensitive to risks and they are reconsidering investments.” The reliability of sovereign credit has come under scrutiny since Nov. 25 when Dubai World, a state-owned holding company, said it would seek a standstill agreement on its debt. The company has since said it’s in talks to renegotiate $26 billion of loans. Dubai World’s private equity arm Istithmar is under pressure from creditors, with an unnamed “senior banker” stating the group was in trouble and hugely leveraged, the Financial Times reported today. The MSCI Asia Pacific Index of regional shares dropped 1.1 percent today. Pacific Investment Management Co., which runs the world’s biggest bond fund, is buying the debt of Abu Dhabi, Qatar and Ras Laffan Liquefied Natural Gas Co., said Michael Gomez, co- head of emerging markets at the fund manager. Dubai World Pimco added to its holdings of securities sold by governments and companies in the region as the Dubai debt crisis slashed prices of bonds sold by its state-controlled companies to record lows. Emerging-market debt fell from the highest since records began in 1993 after Dubai World on Nov. 25 asked lenders for a debt standstill. “We’re coming in and buying,” said Gomez, who is based at Pimco’s main office in Newport Beach, California, in an interview with Bloomberg Television. “In any selloff, we’ll be accumulating even more. We think they’re cheap.” Demand for Treasuries was tempered as the U.S. prepared to sell $13 billion in 30-year bonds today after an investor group including central banks bought the least amount of 10-year notes since June at an auction yesterday. ‘Weaker Auction’ Bonds slid for the first time in three days yesterday after indirect bidders purchased 34.9 percent of the 10-year debt on offer, compared with an average of 45.6 percent since the Treasury made changes in June on how bids are classified. “Towards year-end, investors tend to prefer to shorten their duration,” said Kazuaki Oh’e, a bond salesman in Tokyo at Canadian Imperial Bank of Commerce, the nation’s fifth largest bank. “They aren’t likely to invest in the longer end, which means it’ll be a slightly weaker auction with low indirect bidders. Also there are signs that the economy is recovering.” The difference in yield, or spread, between 2-year and 30- year Treasuries increased to 368 basis points yesterday. The last time it was that wide was in 1992, when the Federal Reserve cut interest rates. Duration is a measure of a bond or portfolio’s sensitivity to changes in yields, and a smaller figure indicates a more bearish position. The previous sale of 30-year bonds, a record $16 billion offering on Nov. 12, drew a high yield of 4.47 percent and attracted bids for 2.26 times the amount on offer, the lowest level since May. Indirect bidders bought 44 percent of the securities. The 30-year bond to be sold today yielded 4.43 percent in pre-auction trading. U.S. government debt has handed investors a loss of 2 percent this year, as measured by Merrill Lynch & Co.’s U.S. Treasury Master Index, as President Barack Obama borrowed record amounts to fund spending programs. To contact the reporter on this story: Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net.

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