By Cordell Eddings and Susanne Walker Jan. 12 (Bloomberg) -- Treasuries rose as China moved to curb bank lending, raising speculation that slowing economic growth will boost demand for U.S. debt as the government prepares to sell $40 billion of three-year notes. Ten-year notes climbed the most in almost a month as stocks fell after Alcoa Inc. reported lower-than-predicted earnings. China raised the proportion of deposits that banks must set aside as reserves to cool the world’s fastest-growing major economy as a credit boom threatens to stoke inflation and create asset bubbles. “The market gets nervous when a major central bank tightens a bit,” said David Ader, head of government bond strategy at Stamford, Connecticut-based CRT Capital Group LLC. “They are willing to take some of the punch away from the party. It provoked a little bit of buying.” The yield on the 10-year note fell eight basis points, or 0.08 percentage point, to 3.73 percent at 9:49 a.m. in New York, according to BGCantor Market data. That’s the most on an intraday basis since it fell as much as 13 basis on Dec. 17. The 3.375 percent security due in November 2019 rose 21/32, or $6.56 per $1,000 face amount, to 97 2/32. Investors should buy Treasuries if the benchmark 10-year note yield closes below 3.768 percent today, a “very bullish” technical level, William O’Donnell, U.S. government bond strategist at RBS Securities Inc in Stamford, Connecticut, wrote in a note to clients. A breach of this level would signal a breakout from a so-called diamond pattern, which signals market direction. RBS is one of 18 primary dealers that trade with the Federal Reserve. China, Alcoa China’s central bank sold bills at a higher yield for the second time in a week, increasing the likelihood that policy makers there will raise the benchmark interest rate in the first half of the year. It also raised the proportion of deposits that banks must set aside as reserves by 50 basis points from Jan. 18. The existing levels are 15.5 percent for big banks and 13.5 percent for smaller ones. The Standard & Poor’s 500 Index declined as 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. Two-year note yields touched the lowest level in more than two weeks. Fed Bank of Atlanta President Dennis Lockhart said yesterday the economic recovery from recession will be slow. The rates dropped by the most since August last week after a government report showed the U.S. unexpectedly lost jobs in December. Futures contracts traded on the Chicago Board of Trade showed a 30 percent chance the U.S. central bank will raise its target lending rate by at least a quarter-percentage point by June, down from 46 percent odds a week earlier. Treasury Auctions Today’s note auction is the second of four this week totaling $84 billion. The three-year securities scheduled for sale today yielded 1.53 percent in pre-auction trading, rising from 1.223 percent at the last sale of the debt 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 Merrill Lynch. $7.27 Trillion The U.S. will sell $21 billion of 10-year notes tomorrow and $13 billion of 30-year debt the next day. Treasuries dropped 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. “There appears to be good demand for fixed income,” said Christian Cooper, an interest-rate strategist at primary dealer RBC Capital Markets in New York. “The bid to fixed income started in the front end of the curve given the backup in the last two weeks. Now we are extending further out of the curve where there is some value with the Fed keeping rates low.” President Barack Obama has increased the U.S. marketable debt to a record $7.27 trillion to fund his economic plans. Treasuries rose yesterday as a $10 billion auction of 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 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 reporters on this story: Cordell Eddings in New York at ceddings@bloomberg.net; Susanne Walker in New York at swalker33@bloomberg.net.

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