Treasuries dropped, with the difference between 2- and 30-year yields at almost a record, as economists said an industry report today will show U.S. manufacturing is growing. Bonds also fell as stocks and metals rose and Egypt’s military pledged not to fire on protesters, easing demand for government securities. Thirty-year debt dropped over the past five months as investors demanded compensation for the prospect of accelerating inflation and on speculation the U.S. may struggle to fund its budget deficit. “There’s no demand at the back end of the market,” said Sean Murphy, a Treasury trader at Societe Generale in New York. “The Egypt situation had turned us around, and got us a little flight to quality. That has come out of the market. The lack of buying may push yields out further, and you could see the curve steepen from here.” Thirty-year bond yields rose four basis points, or 0.04 percentage point, to 4.61 percent at 8:46 a.m. in New York, according to BGCantor Market Data. The price of the 4.25 percent securities maturing in November 2040 dropped 18/32, or $5.63 per $1,000 face amount, to 94 7/32. The extra yield investors demand to hold 30-year bonds instead of 2-year notes touched 4.03 percentage points, compared with a record 4.04 percentage points set Jan. 28. Thirty-year bond yields rose that day to 4.64 percent, the highest level since April 29. Two-year note yields increased four basis points to 0.60 percent today. U.S. Manufacturing The Institute for Supply Management’s factory index was little changed at 58 in January, compared with the eight-month high of 58.5 in the prior month, according to the median forecast of 78 economists in a Bloomberg News survey before today’s report. Readings above 50 signal growth. Caterpillar Inc., the world’s largest maker of construction equipment, reported results on Jan. 27 that topped analysts’ estimates. Thirty-year bonds lost 3.3 percent in January, while the broader government bond market was little changed, according to indexes compiled by Bank of America Merrill Lynch. The long bonds have dropped 15 percent since Aug. 31 in the longest monthly losing stretch since 1999, when the Federal Reserve was switching to raising interest rates from cutting them. Thirty-year yields will advance to 4.80 percent by the end of 2011, according to a Bloomberg survey of banks and securities companies with the most recent forecasts given the heaviest weightings. Gain in Stocks The MSCI World Index rose 0.5 percent, and futures on the Standard & Poor’s 500 Index gained 0.6 percent. Three-month delivery copper on the London Metal Exchange rose as much as 1.4 percent to $9,878 a metric ton. Crude oil for March delivery traded near a 27-month high, $92.84 a barrel, it reached yesterday in New York. The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices over the life of the securities, widened to 2.33 percentage points, from 2010’s low of 1.47 percentage points in August. The five-year average is 2.09. A gauge of inflation watched by the Fed that excludes food and energy items rose 0.7 percent in December from a year earlier, the slowest pace on record. The low rate of inflation is one reason policy makers are pushing ahead with a program to buy $600 billion in U.S. bonds through June to spur economic growth. The central bank is scheduled to buy $1 billion to $2 billion of inflation-protected debt due from April 2013 to February 2040 today under quantitative easing, according to the New York Fed’s website. “Inflation won’t increase much,” said Takuya Yamamoto, who helps oversee the equivalent of $116.2 billion as a portfolio manager in Tokyo at Diam Co., a unit of Dai-Ichi Life Insurance Co., Japan’s second-largest life insurer. “Demand from the Fed” will support the market, he said. Diam bought Treasuries in December, Yamamoto said. To contact the reporters on this story: Daniel Kruger in New York at dkruger1@bloomberg.net; Lukanyo Mnyanda in London at lmnyanda@bloomberg.net To contact the editor responsible for this story: Dave Liedtka at dliedtka@bloomberg.net

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