By Wes Goodman Dec. 18 (Bloomberg) -- Treasuries headed for a weekly gain, trimming this year’s loss, as stocks fell around the world on concern the global economic recovery will slow. Benchmark 10-year yields were little changed today near the lowest level in a week after Federal Reserve officials said on Dec. 16 that the U.S. economy isn’t improving enough for them to raise interest rates from a record low. The U.S. is still in a recession and home prices may resume declines, Harvard University economics professor Martin Feldstein said. “We’re bullish for 2010,” said Hiromasa Nakamura, a Tokyo-based senior investor at Mizuho Asset Management Co., which oversees the equivalent of $21.2 billion and is part of Japan’s second-largest bank. “The Federal Reserve cannot raise interest rates.” The 10-year note yielded 3.48 percent as of 6:30 a.m. in London, according to data compiled by Bloomberg. The 3.375 percent security due November 2019 traded at 99 1/8. The yield fell seven basis points this week, the first decline in December. Ten-year rates dropped to 3.46 percent earlier today, the least since Dec. 10. They will fall to 2.70 percent by the middle of 2010, Nakamura said. The yield set a record low of 2.04 percent a year ago. MSCI’s Asia Pacific Index of shares slid 0.2 percent, falling for a second day. MSCI’s World Index was little changed today after falling 1.7 percent yesterday, the biggest decline since October. Greece, Dubai Investors sought the relative safety of government debt after Standard & Poor’s cut Greece’s credit rating on Dec. 16. Dubai World, the state holding company, sparked a global flight out of higher-yielding assets when it announced last month that it will try to delay payments on $26 billion of debt. “The recession isn’t over,” Harvard’s Feldstein said yesterday in an interview on Bloomberg Radio in New York. “It will be a while before we have enough information to know if the recession ended.” Fed policy makers reiterated a pledge to keep interest rates “exceptionally low” for an “extended period” at the end of their two-day policy meeting this week. The U.S. economy will grow 3 percent in the fourth quarter and slow to 2.65 percent in the first three months of 2010, according to a Bloomberg survey of economists. It expanded 2.8 percent in the third quarter of 2009, following the steepest U.S. economic recession since the 1930s. Higher Rates Treasury bulls such as Nakamura are in the minority. Bloomberg surveys of banks and securities companies show the Fed will raise its target for overnight loans between banks to 0.75 percent in a year from the current range of zero to 0.25 percent. Ten-year yields will climb to 4.04 percent at the end of 2010, according to a Bloomberg survey that gives a heavier weighting to the most recent forecasts. Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., cut holdings of government debt and boosted cash to the most since Lehman Brothers Holdings Inc. collapsed in September 2008. Gross increased cash in the $199.4 billion Total Return Fund’s to 7 percent in November from negative 7 percent in October, according to Pimco’s Web site. The fund can have a so- called negative position by using derivatives, futures or by shorting. He reduced government-related securities to 51 percent from a five-year high of 63 percent in October. Treasuries Overvalued Gross told CNBC on Dec. 7 that Treasuries are overvalued compared to potential inflation. Mark Porterfield, a spokesman at Pimco’s main office in Newport Beach, California, has said the company doesn’t comment on fund holdings. 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 this week, the most in 16 months. “Yields will rise next year,” said Tsutomu Komiya, an investment manager in Tokyo at Daiwa Asset Management Co., which oversees the equivalent of $77 billion. “The U.S. economy will recover and there is a possibility of a rate hike.” Treasuries have handed investors a 1.1 percent loss in December, according to indexes compiled by Bank of America’s Merrill Lynch unit. They are down 2.1 percent this year, heading for their first annual decline in a decade. Government securities returned 3.1 percent in Germany and 0.8 percent in Japan this year, the indexes show. “While recent economic data is better, the global economy is still not out of the woods,” said Gary Pollack, who helps oversee $12 billion as head of fixed-income trading at Deutsche Bank AG’s Private Wealth Management unit in New York. To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.

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