By Paul Dobson and Wes Goodman Dec. 8 (Bloomberg) -- Treasuries rose for a second day as signs that the global economic recovery is losing momentum spurred demand for the relative safety of government debt. The 10-year note yield fell to the lowest level this week after Federal Reserve Chairman Ben S. Bernanke said yesterday the U.S. economy faces “significant headwinds.” Moody’s Investors Service said today the U.S. credit rating may “test the Aaa boundaries” because of worsening public finances. The Treasury is due to sell a record-tying $40 billion of three-year notes today, 10-year debt tomorrow and 30-year bonds on Dec. 10. “The fact that Bernanke chose to specifically cool down the market obviously had an impact,” said Luca Jellinek, a senior rates strategist at ANZ Banking Group Ltd. in London. “We’re not in the trough anymore but it’s not obvious that it’s smooth sailing from now on. That’s reasonably supportive for the whole bond market.” Ten-year note yields fell 2 basis points to 3.42 percent as of 10:15 a.m. in London, according to BGCantor Market Data. The 3.375 percent security maturing in November 2019 rose 1/8, or $1.25 per $1,000 face amount, to 99 22/32. Treasuries rose yesterday, with two-year notes gaining the most in five weeks, after Bernanke’s comments. “Credit remains tight,” inflation “could move lower” and the job market “remains weak,” he said in a speech to the Economic Club of Washington. ‘Subdued Expansion’ New York Fed Bank President William Dudley said yesterday that economic growth will probably weaken slightly in 2010 from the second half of this year and a “subdued” expansion would make it appropriate to keep interest rates near zero. The U.S. central bank cut its target rate for overnight lending between banks to a range of zero to 0.25 percent a year ago. The U.K. and U.S. have “resilient” Aaa ratings, as opposed to the “resistant” top ratings on Canada, Germany and France, Moody’s said in a report published today. None of the top-rated countries are “vulnerable,” or have public finances that are “stretched beyond the point of ‘no return’ to the Aaa category,” the New York-based company said. U.S. marketable debt climbed to a record $7.17 trillion in November, government figures show, as President Barack Obama’s administration embarked on an unprecedented program of borrowing to finance measures to help drag the world economy out of the recession. U.K., Germany U.K. manufacturing output unexpectedly stalled in October after a 1.5 percent increase the prior month, Britain’s Office for National Statistics said today. Industrial production in Germany, Europe’s largest economy, expanded 1 percent the same month from September, the Economy Ministry in Berlin will say at noon local time, according to a Bloomberg survey. Two-year yields dropped 2 basis points to 0.75 percent today. They slid to 0.61 percent on Nov. 27, 1 basis point short of a record, as Dubai World’s decision to stall debt payments sparked a flight to safety. Dubai shares tumbled to the lowest level in almost five months today, on concern the state-owned company is struggling to restructure the debt. The 10-year yield will advance to 3.79 percent by the middle of next year, according the median of 72 analysts’ and strategists’ forecasts compiled by Bloomberg, with the most recent predictions given the heaviest weightings. The Fed comments weren’t enough to get traders to drop bets that policy makers will raise borrowing costs next year. Futures contracts on the Chicago Board of Trade show traders see at least 88 percent odds that the central bank will increase rates by November 2010. Yield Spread The difference between two- and 10-year rates was little changed at 268 basis points today, the most in more than four months, based on previous closing prices. Shorter maturities are more influenced by the outlook for interest rates, while longer-term bonds are more sensitive to expectations for inflation. U.S. Treasuries are overvalued, given the outlook for inflation, Bill Gross, who runs the world’s biggest bond fund at Pacific Investment Management Co., said in an interview with CNBC yesterday. The spread between yields on 10-year notes and Treasury Inflation Protected Securities, or TIPS, a gauge of trader expectations for consumer prices, was little changed at 217 basis points. It was almost zero at the end of 2008. Debt Sales The U.S. is scheduled to auction $21 billion of 10-year notes tomorrow and $13 billion of 30-year bonds on Dec. 10. The three-year notes being sold today yielded 1.27 percent in pre-auction trading, versus 1.404 percent at the previous sale on Nov. 9. Investors bid for 3.33 times the amount of debt on offer at the November auction, the most since at least 1993. Indirect bidders, the category of investors that includes foreign central banks, purchased 68.5 percent of the notes, versus an average of 49.3 for the prior 10 sales. “The market has backed off from extreme low levels over the last two weeks and that may provide a discount going into supply,” said Chris Ahrens, head of interest-rate strategy in Stamford, Connecticut, at UBS Securities LLC. The company is one of the 18 primary dealers that are required to bid at the government’s debt sales. Three-year notes returned almost 2 percent in 2009, versus a 2.1 percent loss for the entire Treasury market, according to indexes compiled by Bank of America Corp.’s Merrill Lynch unit. To contact the reporters on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net; Paul Dobson in London at pdobson2@bloomberg.net

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