Sept. 28 (Bloomberg) -- Treasuries were little changed as investors speculated Federal Reserve officials will signal interest rates will remain at record-low levels for the foreseeable future as inflation remains subdued. Ten-year yields held within 3 basis points of the lowest level in more than two weeks before government reports this week that may show unemployment increased in September and gross domestic product shrank last quarter at a faster pace than previously estimated. Treasuries rose the most in a month last week after policy makers said weakness in the economy is “likely to continue to dampen cost pressures.” “The focus for the market this week will be the U.S. unemployment and growth,” said Michael Rottmann, head of fixed- income research in Munich at UniCredit Markets & Investment Banking. “Those major data releases are really going to set the tone for the bond market.” The yield on the 10-year note rose 1 basis point to 3.32 percent as of 10:30 a.m. in London, according to BGCantor Market Data. The 3.625 percent security due August 2019 declined 2/32, or 63 cents per $1,000 face amount, to 102 18/32. The yield earlier declined to 3.29 percent, the lowest since Sept. 11. Rates slid 15 basis points last week, the most since the five days to Aug. 14. Larger Contraction “Recent data, particularly from the U.S., is pointing towards more moderate growth,” said Tim Schroeders, who helps manage about $1 billion at Pengana Capital Ltd. in Melbourne. The world’s largest economy shrank at a 1.2 percent annual rate from April to June, more than the originally reported 1 percent contraction, according to a Bloomberg News survey before the Commerce Department’s Sept. 30 report. The jobless rate climbed to 9.8 percent this month, from 9.7 percent in August, according to a separate Bloomberg survey before the Labor Department figures on Oct. 2. The difference in yield between two- and 10-year notes is within 3 basis points of the narrowest since May on speculation the Fed will refrain from raising interest rates as the recovery falters. The spread was 2.34 percentage points today, after shrinking to 2.31 percentage points, the least since May. Fed Bank of Dallas President Richard Fisher will speak in Dallas tomorrow on the economy, and Fed Bank of Philadelphia President Charles Plosser will speak later the same day at an economic summit in Easton, Pennsylvania. Interest rates will stay “exceptionally low” for an “extended period,” the Fed said in its most recent policy statement on Sept. 23. U.S. ‘Trapped’ Fed Bank of St. Louis President James Bullard said on Sept. 25 that the U.S. faces the possibility of becoming “trapped” in a situation with low levels of inflation and interest rates near zero. Futures show a 25 percent chance the central bank will raise its benchmark interest rate by the end of January from the current range of between zero and 0.25 percent. The odds for an increase were 30 percent a week ago. Treasuries gained earlier as the central bank prepared to buy notes maturing from May 2012 to November 2013 tomorrow as part of efforts to cap consumer borrowing costs. The Fed is purchasing as much as $300 billion of Treasuries in a program that started in March and is scheduled to end next month. Policy makers last week committed to complete their $1.25 trillion in purchases of mortgage securities and extended the end of the program to March from December. Stoking Inflation Chairman Ben S. Bernanke has emphasized that the central bank can successfully take back more than $1 trillion it pumped into the U.S. banking system to pull the economy out of recession without stoking inflation. Treasury bears say yields are likely to climb as an unprecedented decline in the spread between the interest rate on 30-year mortgages and government notes signals the financial crisis is easing. “The safe bet from here is a gradual rise in yields,” said Gary Pollack, who helps oversee $12 billion as head of fixed-income trading at Deutsche Bank AG’s Private Wealth Management unit in New York. He expects 10-year yields will stay in a range of 3.75 percent to 4.25 percent by the first half of 2010, compared with 3.25 percent to 3.75 percent now. Treasuries’ 2.7 percent loss so far this year, as measured by Merrill Lynch & Co.’s Treasury Master Index, shows investors no longer require the refuge of U.S. government debt that led to a gain of 14 percent in 2008. Borrowing rates have declined on everything from mortgages to corporate bonds after the Fed and the government lent, spent or guaranteed $11.6 trillion to shore up banks and end the recession. Home Buyers Home buyers now pay an average 5.19 percent on 30-year fixed-rate mortgages, according to Bankrate.com. That’s down from 6.46 percent in October 2008. The mortgages cost 1.88 percentage points more than yields on 10-year Treasuries, compared with 3.27 points in December, data compiled by Bloomberg show. Fund managers became less bearish on the outlook for Treasuries, a survey by Ried, Thunberg & Co. showed. The company’s sentiment index climbed to 45 for the week ended Sept. 25 from 43 the prior week. A reading below 50 means investors expect prices to fall. The economic analysis firm in Jersey City surveyed 23 investors overseeing $1.414 trillion. To contact the reporters on this story: Gavin Finch in London at gfinch@bloomberg.net; Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net.

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