Treasuries rose, led by longer- maturity debt, before a government report that economists said will show inflation remains subdued and as yields near a seven- month high attracted investors. Bonds also rallied after yesterday’s biggest slump in a week as a decline in Asian stocks boosted the appeal of safer assets. Treasuries tumbled yesterday as Federal Reserve policy makers said a recovery is continuing and refrained from expanding its $600 billion program of debt purchases. “There’s no serious sign of inflation pressure in the U.S. economy,” said Andy Cossor, Hong Kong-based chief Asia market strategist at DZ Bank AG, Germany’s fifth-largest lender. “I wouldn’t be surprised to see this down move in Treasury prices and up move in yields stall.” The yield on the benchmark 10-year note fell two basis points to 3.45 percent as of 2:37 p.m. in Tokyo, according to data compiled by Bloomberg. The price of the 2.625 percent security due November 2020 rose 5/32, or $1.56 per $1,000 face amount, to 93 3/32. The yield earlier climbed to 3.50 percent, the highest since May 14. Consumer prices excluding food and fuel costs rose 0.6 percent in November from a year earlier, matching the increase the prior month that was the smallest on record, according to a Bloomberg News survey before today’s report. The MSCI Asia Pacific Index of shares dropped 0.5 percent, snapping a two-day gain. Resistance Level The increase in 10-year yields will run into so-called resistance at the “psychologically” important mark of 3.50 percent, Cossor said. Moves in Treasuries have been volatile as liquidity thins going into the holiday season, he said. Treasuries declined earlier today before central-bank reports forecast to show manufacturing expanded, adding to signs the expansion of the world’s largest economy is gaining momentum. Industrial production increased 0.3 percent in November, according to a Bloomberg survey before today’s Fed report. Manufacturing in the New York region expanded this month with the Fed Bank of New York’s general economic index rising to 5 from minus 11.7, a separate Bloomberg survey showed. Notes also dropped earlier on speculation U.S. President Barack Obama’s agreement to extend tax cuts will pass in Congress, supporting growth and spurring inflation. “Economic data is improving but you’ve got a Fed that’s keeping the short rates locked at low levels until they’re very confident that things are improving,” said Warren Potter, a bond portfolio manager at AMP Capital Investors in Wellington, where he helps oversee $3.5 billion in assets. “If 10-year yields keep pushing higher the curve is only going to steepen.” ‘Extended Period’ The difference in yield between two- and 10-year Treasuries expanded to 2.85 percentage points yesterday, the widest since April. That’s approaching the 2.94 percentage point level reached Feb. 18 which is the biggest spread on record. “The economic recovery is continuing, though at a rate that has been insufficient to bring down unemployment,” the Fed said in its statement yesterday. “Household spending is increasing at a moderate pace, but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit.” The central bank retained a commitment to keep its benchmark rate low for an “extended period,” holding the target rate for overnight lending between banks at zero to 0.25 percent, where it has been since December 2008. Fibonacci Analysis Treasury 10-year yields may fall back toward 3 percent as technical indicators show the recent increase has been excessive, according to Canadian Imperial Bank of Commerce. The yield this week climbed above the 61.8 percent retracement of the decline from this year’s high of 4 percent in April to the low of 2.33 percent on Oct. 8, based on a series of numbers known as Fibonacci sequence. “Yields may fall toward 3 percent toward year-end, before possibly retesting the 61.8 percent retracement level to form a double-top,” said Kazuaki Oh’e, Tokyo-based executive director of fixed income, currencies and distribution at Canada’s fifth- largest lender. The yield’s 14-day relative strength index is showing “slightly excessive movement,” Oh’e said. The RSI is above the 70 level some traders see as a sign an asset’s value is poised to change direction. To contact the reporter on this story: Candice Zachariahs in Mumbai at czachariahs2@bloomberg.net. To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net.

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