By Anna Rascouet and Wes Goodman Nov. 20 (Bloomberg) -- Two-year Treasuries were little changed, set for a fourth week of advances, amid concern the rally in risk assets has outpaced growth prospects and as Federal Reserve officials signaled interest rates will stay low. The yield stayed within two basis points of the lowest level since December. Treasury three-month bill rates turned negative yesterday for the first time since last year’s credit freeze. Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said the “systemic risk” of new asset bubbles is rising. Fed Bank of Philadelphia President Charles Plosser said yesterday he’s not concerned about inflation in the short run. “The Fed officials’ comments have pushed rates expectations back by three months,” said David Keeble, head of fixed-income strategy in London at Calyon, the investment- banking arm of Credit Agricole SA. “Risk aversion is coming back but there’s little more to do with the front end. With bill yields being so low, it’s hard to get enthusiastic.” The two-year Treasury yield dropped 11 basis points this week to 0.7 percent as of 9:30 a.m. in London today. The 1 percent security due Oct. 2011 traded at 100 18/32. The rate dropped to 0.68 percent yesterday, the lowest level since December. The three-month bill rate was 0.005 percent, according to generic Bloomberg data. The 10-year yield climbed 1 basis point to 3.35 percent. Global Average The global average government bond yield dropped to 2.20 percent yesterday from 2.50 percent in August, according to the Merrill Lynch Global Sovereign Broad Market Plus Index. Rates turned negative yesterday on some bills maturing in January, according to Sarah Sobeck, a Treasury trader at Jefferies & Co. one of 18 primary dealers that trade directly with the Fed. Bill rates were negative last December for the first time since the government began selling the securities in 1929 as investors sought to preserve their principal following the collapse of Lehman Brothers Holdings Inc. Investors were willing to pay the U.S. government just to hold its sovereign debt after stocks tumbled around the world yesterday, curbing demand for higher-yielding assets. The MSCI World Index of shares, which has returned 25 percent so far this year, fell 1.7 percent yesterday in its biggest decline this month. The index is valued at 31.57 times reported earnings, a figure that has more than tripled in a year. Reflating the Economy European shares rebounded today from their biggest loss this month, climbing 0.5 percent. “The Fed is trying to reflate the U.S. economy,” Gross wrote in his December investment outlook posted on the Newport Beach, California-based company’s Web site yesterday. “The process of reflation involves lowering short-term rates to such a painful level that investors are forced or enticed to term out their short-term cash into higher-risk bonds or stocks.” Two-year notes, among the most sensitive to Fed interest rates because of their short maturity, returned 1.6 percent this year, according to indexes compiled by Bank of America’s Merrill Lynch unit. Ten-year notes, which are more sensitive to inflation, have fallen 6.4 percent. Ten-year yields were as low as 3.1 percent on Oct. 2, and it will be “difficult” for yields to push below that level now, Citigroup Global Markets Inc. said in a report today. ‘Short Positions’ “Investors should look to build short positions at current and lower levels,” Amitabh Arora and Joe Leary wrote for Citigroup, a primary dealer. Shorting is borrowing and selling an asset in anticipation of making a profit by buying it back after its price has fallen. The difference between rates on 10-year notes and Treasury Inflation Protected Securities, or TIPS, which reflects the outlook among traders for consumer prices, widened to 2.18 percentage points from about zero at the end of last year. The figure is in line with the five-year average. Under what Pimco has termed the “new normal,” investors should be prepared for lower-than-average historical returns with heightened government regulation, lower consumption, slower growth and a shrinking global role for the U.S. economy. With unemployment at a 26-year high of 10.2 percent, Gross said the central bank is unlikely to raise interest rates until nominal gross domestic product increases 4 percent to 5 percent for another 12 months. Economic ‘Headwinds’ The Fed cut its target for overnight bank lending to a range of zero to 0.25 percent in December. Fed Bank of St. Louis President James Bullard said on Nov. 18 that experience indicates policy makers may not start to increase borrowing costs until early 2012. Bullard’s comments followed a Nov. 16 speech by Fed Chairman Ben S. Bernanke in which he indicated that the central bank’s extended period of low borrowing costs may be even longer amid economic “headwinds.” Futures contracts on the Chicago Board of Trade showed a 10 percent chance the Fed will increase its target for overnight bank loans to 0.5 percent in March, down from a 32 percent likelihood a month ago. To contact the reporter on this story: Anna Rascouet in London at arascouet@bloomberg.netWes Goodman in Singapore at wgoodman@bloomberg.net.

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