By Theresa Barraclough Dec. 21 (Bloomberg) -- Treasuries were little changed, poised to extend gains into a second week, as expectations the Federal Reserve will maintain near-zero interest rates outweighed gains in stocks and commodities. The spread between two- and 10-year yields, known as the yield curve, is near the widest since June after policy makers last week pledged to keep interest rates “exceptionally low” for “an extended period.” Ten-year yields slid towards a one- week low amid concern Dubai World may be unable to present a “standstill” offer to lenders today. “I recommend buying Treasuries,” said Yasutoshi Nagai, chief economist at Daiwa Securities SMBC Co. in Tokyo, part of Japan’s second-largest brokerage. “The current yield and spread is very attractive.” The benchmark 10-year note yielded 3.54 percent as of 1:38 p.m. in Tokyo, according to BGCantor Market Data. The 3.375 percent security due November 2019 traded at 98 20/32. The yield fell one basis point last week. Ten-year yields are likely to slide to 3.3 percent by Dec. 31, Nagai said. Should his predictions prove accurate, investors who buy the debt today would make a 2.1 percent return, Bloomberg data show. Yield Curve The yield differential between two- and 10-year notes expanded to 2.75 percentage points today, from 2.53 percentage points at the end of last month, according to data compiled by Bloomberg. “Household spending appears to be expanding at a moderate rate,” the Federal Open Market Committee said in a statement on Dec. 16 after meeting. “Though it remains constrained by a weak labor market, modest income growth, lower housing wealth, and tight credit.” Consumer spending rose 0.7 percent in November, according to the median estimate in a Bloomberg survey before a Commerce Department report Dec. 23. Fed funds futures contracts on the Chicago Board of Trade show a 10.5 percent chance the central bank will increase rates by the March policy meeting, down from a 13.2 percent chance a week ago. Dubai World, one of the emirate’s three main state-owned business groups, announced Nov. 25 it would seek to freeze or delay repaying debt. It may be unable to present a “standstill” offer to lenders today as the terms of government support for the state-owned holding company have yet to be agreed upon, two bankers involved in the talks said. Inflation Concern The Dubai news “may prove supportive for Treasuries and the dollar today in Asia, while weighing on equities,” Kenny Borowicz, a senior vice president at MF Global Singapore Ltd., part of the world’s largest broker of exchange-traded futures and options contracts, wrote today in a note. Treasury bears say yields are likely to climb as rising commodity prices spur concern inflation will increase in the coming months. A survey of investors by Ried, Thunberg & Co. showed fund managers remained bearish on Treasuries. The company’s index measuring the outlook through the end of March was little changed at 43, from 42 last week. A figure below 50 shows investors expect prices to fall. The company, based in Jersey City, New Jersey, interviewed 22 fund managers controlling $1.39 trillion. Crude oil for January delivery rose as much as 4.7 percent on Dec. 18 as Iraq’s National Security Council said that Iran violated their shared border and Iraq’s “territorial integrity.” Oil now trades at $73.41 per barrel and the MSCI Asia Pacific Index of regional shares advanced 0.2 percent today. Yield Gap The gap between yields on Treasuries and so-called TIPS due in 10 years, a measure of the outlook for consumer prices, closed above 2.25 percentage points four days last week, the longest stretch since August 2008. That’s the low end of the range in the five years before Lehman Brothers Holdings Inc. collapsed, and shows traders expect inflation, not deflation in coming months, said Jay Moskowitz, head of TIPS trading at CRT Capital Group LLC in Stamford, Connecticut. Fed Chairman Ben S. Bernanke has cited tame inflation expectations for keeping the target interest rate for overnight loans between banks at a record low range of zero to 0.25 percent. TIPS show the improving economy may change sentiment and spark further losses in bonds. Yields on the benchmark 10- year Treasury note hit a four-month high of 3.62 percent last week. “It could be an environment where we see 4 percent on 10- year yields, which we think is probably likely in the near term,” said Carl Lantz, an interest-rate strategist in New York at Credit Suisse Securities Group AG, one of the 18 primary dealers of U.S. government securities that trade with the Fed. To contact the reporter on this story: Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net

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