By Wes Goodman Jan. 6 (Bloomberg) -- Treasuries fell for the first time in three days before private reports today on U.S. service industries and jobs that economists said will show the recovery is getting stronger. Investors demanded additional yield to buy Treasuries instead of German bunds after Bill Gross, who runs the world’s biggest debt fund at Pacific Investment Management Co., said the securities may offer an alternative to U.S. bonds. Gross said there are a number of reasons to “have doubts” about Treasuries, an in interview with Time magazine. “It’s difficult to invest in long maturities” in the U.S., said Tsutomu Komiya, who handles Treasuries at Daiwa Asset Management Co. in Tokyo, which oversees the equivalent of $77 billion. “The data show the U.S. continues to improve.” The 10-year note yield rose two basis points to 3.78 percent as of 1:48 p.m. in Tokyo, according to data compiled by Bloomberg. The 3.375 percent security due in November 2019 fell 5/32, or $1.56 per $1,000 face amount, to 96 21/32. A basis point is 0.01 percentage point. Two-year yields climbed three basis points to 1.04 percent. Shorter maturities, which tend to track the Federal Reserve’s benchmark interest rate, are more attractive because the central bank has promised to keep borrowing costs down, Komiya said. The Institute for Supply Management’s index of non- manufacturing businesses, which account for almost 90 percent of the economy, rose to 50.5 in December from 48.7 in November, according the median estimate of economists surveyed by Bloomberg News. A separate report may show companies cut the fewest jobs last month since January 2008. Credit Markets After rallying 14 percent in 2008 when credit markets froze, Treasuries fell 3.72 percent on average last year, based on indexes compiled by Bank of America’s Merrill Lynch unit. Investors shunned government debt while the U.S. raised a record $2.11 trillion selling securities amid signs that the worst economic slump since World War II is ending. “I’d be careful about this continuing assumption that U.S. Treasuries are the place to go,” Gross told Time, in an article the magazine published on its Web site yesterday. “There are a number of reasons to have doubts about Treasuries.” U.S. securities carry “sovereign risk” and the dollar is “over owned,” said Gross, who is based in Newport Beach, California. Demand from China, the largest overseas owner of U.S. debt, may wane, he said. German Bunds “We would probably try and substitute for our Treasuries with sovereign bonds of potentially higher quality,” Gross told Time. “Germany has problems, but it’s in a much better budget situation than the U.S. because of a constitutional amendment three months ago that forces a balanced budget in four years.” German bonds returned 1.96 percent in 2009 while Treasuries fell, the Merrill indexes show. Investors are demanding 41 basis points of extra yield to buy 10-year Treasuries instead of same-maturity German bunds, increasing from 39 basis points yesterday. The spread was 50 basis points on Dec. 22, the most in 29 months. U.S. two-year notes completed their biggest two-day gain in almost three weeks yesterday as pending home sales fell more than forecast in November, signaling the industry whose slump led America into recession has yet to recover. The central bank is scheduled to release the minutes from its Dec. 15-16 meeting today. Fed Chairman Ben S. Bernanke and his colleagues reiterated a pledge to keep the target rate at almost zero at the session. “We expect the continued mantra of lower rates for an extended period,” said Michael Pond, an interest-rate strategist in New York at Barclays Plc, one of the 18 primary dealers that are required to bid at the government bond sales. Buyers Returning Treasuries offer value after 10-year yields rose 64 basis points in December, the most in almost six years, said Andy Cossor, the Hong Kong-based chief market strategist for Asia for Frankfurt-based DZ Bank, Germany’s fifth-largest lender. “Buyers have come back,” he said. “The level of yields is attractive. The Fed is in no hurry to raise rates, and you’ve still got low inflation.” Ten-year yields will fall to 3.7 percent in three months, Cossor said. The difference between yields on 10-year notes and Treasury Inflation Protected Securities, or TIPS, a gauge of trader expectations for consumer prices, widened to 2.37 percentage points from 0.29 percentage points a year ago. It is still down from 2008’s high of 2.61 percent before the global economic recession sent inflation expectations tumbling. Treasury 10-year yields will rise to about 4.25 percent this quarter as the Fed ends asset purchases aimed at reviving the housing market, according to Credit Suisse Group AG. Everyone Concerned “That hand-off has everyone in the bond market quite concerned,” Carl Lantz, an interest-rate strategist in New York at Credit Suisse Securities USA LLC, said in an interview on Bloomberg Radio yesterday. This year “there is a lot more fixed-income paper for the private sector to digest.” The company is another primary dealer. The Fed’s program to buy as much as $1.25 trillion of agency mortgage-backed securities is scheduled to end as soon as March. To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.

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