By Anna Rascouet and Wes Goodman Feb. 26 (Bloomberg) -- Treasuries headed for a second weekly gain as the threat of a default by Greece fueled demand for the safety of U.S. debt and Federal Reserve Chairman Ben S. Bernanke pledged to hold interest rates at a record low. A rally yesterday pushed the yield on the 10-year bond to a two-week low as an unexpected increase in first-time claims for jobless insurance indicated the labor market is still struggling to recover. Standard & Poor’s and Moody’s Investors Service both said this week that Greece faces potential debt downgrades. “It’s beginning to dawn on people that the economy isn’t flowering,” said Marc Ostwald, a fixed-income strategist at Monument Securities Ltd. in London. “And clearly what’s going on in Greece with sovereign credit is supportive of Treasuries.” The 10-year note yielded 3.64 percent as of 8:42 a.m. in London, according to BGCantor Market Data. It’s fallen 14 basis points this week. The yield dropped to 3.62 percent yesterday, the lowest since Feb. 10. The 3.625 percent security due February 2020 traded at 99 27/32. Treasuries returned 0.1 percent in February as of yesterday, according to indexes compiled by Bank of America Corp.’s Merrill Lynch & Co. The gain extends a 1.6 percent advance from January. Demand for safety is helping send German bond rates lower. The extra yield the nation’s two-year securities offer over similar-maturity U.S. notes shrank to 12 basis points, close to the narrowest since 2007, from 61 basis points three months ago. German Bonds German bonds returned 0.9 percent this month, while Japanese government securities were little changed, the Merrill indexes show. The MSCI World Index of shares returned 0.8 percent. The difference between yields on Merrill’s global index of corporate bonds and benchmark government securities widened to 1.69 percentage points from January’s low of 1.60 percentage points. That’s down from 4.73 percentage points a year ago. Unlike during the financial crisis, debt strains in Europe haven’t pushed up money market rates. The so-called TED spread, the difference between what banks and the Treasury pay to borrow money for three months, narrowed to 13.7 basis points yesterday, the least since 2003. The figure was as high as 4.64 percentage points in October 2008 as credit markets froze around the world. It was at 13.9 basis points today. Economic growth will send yields higher later in the year, said Shun Totani, senior fund investor for Tokyo-based Asahi Life Asset Management Co., which oversees the equivalent of $1.4 billion in debt. “The economy is getting better,” he said. Yields will rise “just a little” in 2010, he said. Home Sales Gains from bonds today may be limited before a report on housing. U.S. existing home sales increased 0.9 percent in January, rebounding from a 16.7 percent decline in December, according to a Bloomberg News survey before the National Association of Realtors issues the figure today. A separate report today will show the U.S. economy expanded at a 5.7 percent rate in the final three months of 2009, unchanged from an earlier estimate and the fastest pace in six years, economists said. A Bloomberg survey of banks and securities companies shows the 10-year yield will advance to 4.13 percent by year-end. Treasuries climbed yesterday as concern that Greece’s credit ratings will be cut boosted demand at a $32 billion auction of seven-year securities. The number of bids was 2.98 times the amount of securities offered, the highest ratio since the note was reintroduced in February 2009 after a 16-year hiatus. ‘Perfect’ Timing “The timing is perfect,” said William Larkin, a fixed- income portfolio manager in Salem, Massachusetts, at Cabot Money Management, which oversees $500 million. “We’ve gotten political turmoil in global markets. It looks like there’s the potential for a double dip in Europe.” Yesterday’s sale was the last of four auctions this week totaling a record $126 billion. Greece may have its sovereign rating lowered within months if it fails to meet the objectives in its plan to reduce its budget deficit, Pierre Cailleteau, managing director of sovereign risk at Moody’s Investors Service, said yesterday. Standard & Poor’s said Feb. 24 it may downgrade Greece. Government reports yesterday showed the number of Americans filing first-time jobless claims unexpectedly rose and orders for durable goods excluding transportation items fell. Labor Markets Bernanke said Feb. 24 slack labor markets and low inflation will allow the Fed to keep the benchmark lending rate, which has been in a range of zero to 0.25 percent for more than a year, low “for an extended period.” “I’m bullish for this year,” said Akira Furugori, who is in charge of investing in Treasuries in Tokyo at Sumitomo Life Insurance Co., which as equivalent of $224 billion in assets. “I don’t think the Fed will hike rates. Employment and consumption will be weak.” The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices, fell to 2.17 percentage points yesterday, the lowest level in two months. It has narrowed from as high as 2.49 percentage points in January. To contact the reporter on this story: Anna Rascouet in London at arascouet@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net

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