By Matthew Brown and Wes Goodman Jan. 12 (Bloomberg) -- Treasuries gained after China guided its benchmark money-market rate higher and Australian home-loan approvals declined, raising speculation global economic growth will slow. Ten-year notes climbed the most in a week as investors sought the relative safety of U.S. debt following lower-than- predicted earnings at Alcoa Inc., the largest U.S. aluminum producer. Traders added to bets the Federal Reserve will hold borrowing costs near zero to aid the U.S. recovery from recession. The Treasury is scheduled to sell a record-tying $40 billion of three-year notes today in the second of four auctions this week totaling $84 billion. “China’s rate outlook and disappointing earnings from Alcoa are both helping Treasuries at the expense of equities,” said Christoph Rieger, co-head of fixed-income strategy at Commerzbank AG in Frankfurt. “The market has made sufficient room for the supply that’s waiting in the wings.” The yield on the 10-year note declined 6 basis points to 3.76 percent as of 10:40 a.m. in London, according to BGCantor Market data. The 3.375 percent security due November 2019 rose 14/32, or $4.38 per $1,000 face amount, to 96 27/32. China’s central bank guided its one-year bill yield higher today for the first time in 20 weeks to curb record lending growth that has helped power the world’s fastest-growing major economy. The People’s Bank of China sold the bills at 1.8434 percent, an increase of eight basis points, according to a statement on the central bank’s Web site. Alcoa Profit In the U.S., Alcoa said profit excluding certain items was 1 cent a share, trailing analysts’ average estimate for earnings of 6 cents. The net loss of $277 million, or 28 cents a share, narrowed from a loss of $1.19 billion, or $1.49, a year earlier. Futures contracts traded on the Chicago Board of Trade showed a 32 percent chance the U.S. central bank will raise its target lending rate by at least a quarter-percentage point by June, down from 51 percent odds a week earlier. Australian 10-year bond yields dropped by the most in a week after a government report showed the number of loans granted to build or buy houses and apartments slumped 5.6 percent in November. They fell in October by a revised 1.9 percent, the statistics bureau said in Sydney today. The yield on the Australian 5.25 percent note maturing in March 2019 fell 5 basis points to 5.63 percent. A basis point is 0.01 percentage point. Slow Recovery Two-year yields fell to the lowest level in more than two weeks yesterday as Fed Bank of Atlanta President Dennis Lockhart said the U.S. recovery from recession will be slow. They dropped by the most since August last week after a government report showed the U.S. unexpectedly lost jobs in December. The three-year securities scheduled for sale today yielded 1.55 percent in pre-auction trading, rising from 1.223 percent at the last sale of the securities on Dec. 8. The bid-to-cover ratio, which gauges demand by comparing total bids with the amount of securities offered, was 2.98 last month, compared with an average of 2.78 for the past 10 sales. Indirect bidders, the group that includes foreign central banks, bought 60.9 percent of the securities, versus the 10-sale average of 50.9 percent. Three-year Treasuries returned 1.1 percent in the past six months, versus a 2.8 percent loss for 10-year notes, according to indexes compiled by Bank of America Corp.’s Merrill Lynch unit. Record Borrowings Treasuries fell 3.72 percent on average last year, the first loss in a decade, as the U.S. economy began to revive and government debt sales climbed to the most ever, the Merrill indexes show. President Barack Obama has increased the U.S. marketable debt to a record $7.27 trillion to fund his economic plans. The difference between two- and 10-year Treasury yields was near a record on speculation Fed efforts to spur the economy will lead to faster inflation. The spread was 2.85 percentage points, after widening to 2.90 percentage points yesterday, the most ever. Treasuries rose yesterday as the U.S. sold $10 billion in inflation-protected notes. The Treasury Inflation Protected Securities maturing in 10 years drew a yield of 1.43 percent, compared with a forecast of 1.432 percent in a Bloomberg survey. The bid-to-cover ratio, which gauges investor demand by comparing total bids with the amount of securities offered, was 2.65, compared with 3.12 at the last offering in October, the most since January 1999. ‘Recurring Pattern’ “The pattern of supply-digestion fears giving way to better-than-expected take downs has been a recurring one since fiscal burdens were ratcheted up in 2008,” said Sean Maloney, a fixed-income strategist in London at Nomura International Plc. “While the macro profile remains at best uncertain, this is a cycle that is unlikely to change.” The difference between yields on 10-year notes and Treasury Inflation Protected Securities, or TIPS, a gauge of trader expectations for consumer prices, widened to 2.49 percentage points yesterday, the most since July 2008. It was at 2.47 percentage points today. To contact the reporter on this story: Matthew Brown in London at mbrown42@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net.

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