Treasuries held a gain from yesterday, trimming December’s loss, on speculation the U.S. economy will grow in 2011 without spurring inflation. Real U.S. 10-year yields of 2.24 percent, adjusted to account for costs in the economy, are higher than in Germany, the U.K. or Japan. The dollar will maintain its reserve status in 2011, and support for the currency is being reflected in overseas demand for U.S. debt, according to Pacific Investment Management Co., which runs the world’s biggest bond fund. “The deflation situation is serious,” said Hiromasa Nakamura, who helps oversee the equivalent of $36.8 billion as a senior investor in Tokyo at Mizuho Asset Management Co., a unit of Japan’s second-largest publicly traded bank. “Treasury yields will decline.” U.S. 10-year notes yielded 3.34 percent as of 2:47 p.m. in Tokyo, according to BGCantor Market Data. The 2.625 percent security due November 2020 traded at a price of 94 1/32. The rate dropped 13 basis points, or 0.13 percentage point, yesterday. The 10-year yield will decline to 3.11 percent by March 31, according to a Bloomberg survey of banks and securities companies, with the most recent forecasts given the heaviest weightings. Nakamura predicts 2.8 percent. Real 10-year rates are 1.32 percent in Germany, 1.04 percent in Japan and 0.27 percent in the U.K., Bloomberg data show. U.S. consumer prices excluding food and energy costs increased 0.8 percent in November from the year before, according to the Labor Department. The gain was 0.6 percent in October, a record low based on department figures that start in 1958. Deflation is a general decline in prices. Store of Reserves China and Europe aren’t developed enough for their currencies to replace the dollar as the place to store reserves, Anthony Crescenzi, a money manager at Pimco in Newport Beach, California, wrote in a report yesterday. Growth in currency reserves to a record this year helped curb an increase in Treasury yields as investors outside the U.S. scooped up the nation’s debt. President Barack Obama’s administration is counting on foreign money managers, who own half of the outstanding $8.75 trillion in marketable Treasury securities, to keep buying as the U.S. borrows record amounts. “Support has been superfluous, as evidenced by both the relatively low level of market interest rates and the broad level of participation in the Treasury’s regular auctions,” Crescenzi wrote. “The U.S. will remain a ‘going concern’ and preserve investments in dollar assets, albeit at lower rates of return than in other countries, notably those in the emerging markets.” December Decline At a Treasury seven-year auction yesterday, indirect bidders including foreign central banks bought 64.2 percent of the notes, the highest level since June 2009. Treasuries still fell in December as investors sought higher returns than those available on government bonds. An index of U.S. securities due in more than a year fell 2.1 percent in December, according to figures compiled by Bloomberg and the European Federation of Financial Analysts Societies. It is the worst performance of 26 sovereign debt indexes. MSCI’s All Country World Index of shares returned 7.4 percent this month, according to data compiled by Bloomberg. To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net. To contact the editor responsible for this story: Rocky Swift at rswift5@bloomberg.net.

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