By Wes Goodman Dec. 17 (Bloomberg) -- Treasuries rose, pushing 10-year notes to their biggest gain in more than a week, after Greece’s debt rating was cut by Standard & Poor’s yesterday. S&P said it would take further action unless Prime Minister George Papandreou tackles the European Union’s largest budget deficit, spurring demand for the relative safety of U.S. debt. Treasuries also gained as Asian stocks dropped. “The credit crisis may not be over,” said Kazuaki Oh’e, a bond salesman in Tokyo at Canadian Imperial Bank of Commerce, the nation’s fifth-largest lender. “There’s a flight to quality.” Ten-year note yields fell two basis points to 3.58 percent as of 12:51 p.m. in Tokyo, according to data compiled by Bloomberg. The 3.375 percent security due in November 2019 rose 1/8, or $1.25 per $1,000 face amount, to 98 9/32. The MSCI Asia Pacific Index of regional shares declined 0.6 percent, erasing a gain from yesterday. Concern that some countries may struggle to pay their debt was reignited after Dubai’s state-owned Dubai World said on Dec. 1 it wanted to restructure $26 billion of bonds. Treasury yields will rise in 2010 as the U.S. economy recovers, some investors and economists said. Ten-year yields will advance to 3.68 percent by the middle of next year, according to a Bloomberg survey of banks and securities companies, with the most recent forecasts given the heaviest weightings. Leading Indicators The index of leading indicators, a gauge of the U.S. outlook for the next three to six months, advanced 0.7 percent in November after a 0.3 percent gain in October, according to the median forecast of 61 economists surveyed by Bloomberg News. The Conference Board reports the figure today. Fewer Americans filed for jobless benefits last week, and Philadelphia-area manufacturing expanded for a fifth month, other reports today may show. The Federal Reserve said yesterday that “economic activity has continued to pick up.” Policy makers are considering how to withdraw the more than $1 trillion they pumped into the financial system to combat the deepest recession since the 1930s. “The market may be preparing for an exit from the special facilities,” said Kei Katayama, who oversees $1.6 billion of non-yen debt in Tokyo as leader of the foreign fixed-income group at Daiwa SB Investments Ltd., a unit of Japan’s second- biggest investment bank. “There will be upward pressure on yields.” Fed Pledge Ten-year rates climbed as high as 3.62 percent on Dec. 15, the most since Aug. 13, from the record low of 2.04 percent set on Dec. 18, 2008. Fed policy makers also repeated their pledge to hold interest rates at a record low for an “extended period.” They cut their target for overnight loans between banks to a range of zero to 0.25 percent in December last year. The difference between two- and 10-year rates widened to as much as 2.78 percentage points, the most since June. Yields on the 2011 notes, which tend to track the Fed’s benchmark because of their short maturity, are being anchored by the central bank’s promise to keep borrowing costs down. Longer-term yields, the so-called back end of the Treasury market, are rising as President Barack Obama borrows record amounts as he tries to sustain economic growth, increasing U.S. marketable debt to a record $7.17 trillion from $5.80 trillion at the end of last year. ‘Stay Away’ “We’re telling people to stay away from the back end,” James Caron, head of U.S. interest-rate strategy at Morgan Stanley in New York, said in an interview yesterday. “If there are any selling pressures that have to come into the marketplace, through supply or for other reasons, it’s going to be manifest mainly in the back end.” Morgan Stanley is one of the 18 primary dealers required to bid at the government’s debt sales. Yields indicate traders are adding to bets that inflation will quicken. The spread between yields on 10-year notes and Treasury Inflation Protected Securities, or TIPS, a gauge of trader expectations for inflation, widened to 2.31 percentage points yesterday, the most in 16 months. “The market is saying the Fed is tilted to an inflationary bias,” said Mark MacQueen, partner and portfolio manager in Austin, Texas, at Sage Advisory Services Ltd., which oversees $8.5 billion. Most of the programs the Fed implemented to restore trading in credit markets that froze last year will expire on Feb. 1 as scheduled, the central bank said following its meeting yesterday. The central bank said it will continue purchases of agency mortgage-backed securities totaling $1.25 trillion and about $175 billion of agency debt through the first quarter of 2010. “The Fed is preparing investors for the day when it does have to end its ultra-easy monetary policy,” Thomas Higgins, chief economist at Payden & Rygel, a Los Angeles-based money management companies that oversees $50 billion, wrote in a report yesterday. To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.

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