By Lukanyo Mnyanda and Wes Goodman March 2 (Bloomberg) -- Two-year Treasuries snapped four days of gains as stock markets rose and speculation mounted that a report tomorrow will show the U.S. labor market is stabilizing, reducing demand for the safest assets. Losses pushed the yield on the 10-year note up from within 2 basis points of a three-week low as the MSCI World Index advanced for a third day. Philadelphia Federal Reserve Bank President Charles Plosser said the central bank should back away from its pledge to keep interest rates low for an “extended period,” the Wall Street Journal reported yesterday. “There’s been better risk appetite generally, equity markets have managed to bounce and bonds haven’t done an awful lot,” said Padhraic Garvey, head of investment-grade debt strategy at ING Groep NV in Amsterdam. “For as long as we have reasonable macro data, ultimately bond yields should be rising and equity markets should also be rising.” The two-year note yield increased 1 basis point to 0.81 percent as of 6:05 a.m. in New York, according to BGCantor Market Data. The 0.875 percent security due February 2012 held at 100 4/32. The 10-year note yield climbed 1 basis point to 3.62 percent. The yield dropped to 3.58 percent on Feb. 26, the lowest level since Feb. 9. Companies in the U.S. cut an estimated 20,000 jobs in February, down from 22,000 in January, data from ADP Employer Services will show tomorrow, according to the median prediction of 31 economists surveyed by Bloomberg. ‘Tying our Hands’ “I’m not really fond of this notion that ‘extended period’ means six months. That’s tying our hands in a way that seems to be inappropriate and unnecessary,” Plosser told the Journal in an interview. Plosser made similar remarks at a speech in Philadelphia last month. Fed presidents rotate in voting on monetary policy, with Plosser voting next year. Plosser said in the interview that the economy is “beginning to solidify.” Bond bears say yields will rise later in 2010 as the economic recovery is sustained and investors bet on interest- rate increases. The 10-year yield will advance to 4.12 percent by year-end, according to a Bloomberg survey of banks and securities companies with the most recent forecasts given the heaviest weightings. “Yields will rise on the back of the economic recovery starting to show through more solidly,” said Andy Cossor, Hong Kong-based chief market strategist for Asia at Frankfurt-based DZ Bank, Germany’s fifth-largest lender. Interest-Rate Futures Ten-year yields will climb to 3.90 percent by mid-year, and the Fed will start raising rates in the second half of 2010, bringing its benchmark rate to 1 percent by Dec. 31, he said. Interest-rate futures on the Chicago Board of Trade showed a 46 percent chance U.S. policy makers will raise the benchmark target rate for overnight loans by at least 25 basis points by November. The rate is currently at record low, between zero and 0.25 percent. The Fed said Feb. 18 it was increasing the discount rate charged on direct loans to banks to 0.75 percent. Former Fed Chairman Paul Volcker said at a presentation that the U.S. economy faces substandard growth for a while and the Fed should not yet remove liquidity from the markets, according to Jonathan Slone, the chief executive of CLSA Asia- Pacific Markets, the Hong Kong-based brokerage that organized the address. Volcker spoke during a question-and-answer session with investors yesterday in San Francisco. Reporters weren’t allowed to attend. Gross View Investors should focus on governments with lower credit or inflation risks, including Germany and Canada, while avoiding Greece and the U.K., said Bill Gross, who runs the world’s biggest mutual fund at Pacific Investment Management Co. Government bailouts suggest a global “unicredit” type of bond market where rates on sovereign debt will resemble the yields of corporations and industries they guarantee, he wrote in a monthly investment outlook posted on Pimco’s Web site yesterday. “Sovereign yields will become more credit-like,” he wrote. “When sovereign issues become more credit-like as evidenced in Greece, Spain, Portugal and a host of others, they move closer in yield to the corporate and agency debt that supposedly rank lower in the hierarchy.” To contact the reporter on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net.

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