By Wes Goodman Feb. 26 (Bloomberg) -- Treasuries headed for a second monthly gain as the threat of a default by Greece fueled demand for the safety of U.S. debt and Federal Reserve Chairman Ben S. Bernanke pledged to hold interest rates at a record low. A rally yesterday pushed the market higher for February, erasing earlier losses, as an unexpected increase in first-time claims for jobless insurance indicated the labor market is still struggling to recover. An industry report today will show sales of previously owned homes rose in January, economists said. “The situation is quite severe, more than I expected,” said Satoshi Okumoto, an investment manager in Tokyo for Fukoku Mutual Life Insurance Co., which oversees the equivalent of $61.6 billion. “People are starting to fear the risk of a sovereign default” in Europe. The 10-year note yielded 3.65 percent as of 1:44 p.m. in Tokyo, according to data compiled by Bloomberg. The yield dropped to 3.62 percent yesterday, a two-week low. The 3.625 percent security due February 2020 traded at 99 26/32. Okumoto cut his year-end forecast for 10-year yields to 3.75 percent from 4 percent a week ago. Treasuries returned 0.1 percent in February as of yesterday, according to indexes compiled by Bank of America Corp.’s Merrill Lynch & Co. The gain extends a 1.6 percent advance from January. Demand for safety is helping send German bond rates lower. The extra yield the nation’s two-year securities offer over similar-maturity U.S. notes shrank to 12 basis points, close to the narrowest since 2007, from 61 basis points three months ago. German Bonds German bonds returned 0.9 percent this month, while Japan government securities were little changed, the Merrill indexes show. The MSCI World index of shares returned 0.9 percent. The difference between yields on Merrill’s global index of corporate bonds and benchmark government securities widened to 1.69 percentage points from January’s low of 1.60 percentage points. It is down from 4.73 percentage points a year ago. Unlike during the financial crisis, debt strains in Europe haven’t pushed up money market rates. The so-called TED spread, the difference between what banks and the Treasury pay to borrow money for three months, narrowed to 13.7 basis points yesterday, the least since 2003. The figure was as high as 4.64 percentage points in October 2008 as credit markets froze around the world. Greece’s Rating Treasuries climbed yesterday as concern Greece’s credit ratings will be cut boosted demand at a $32 billion auction of seven-year securities. The number of bids was 2.98 times the amount of securities offered, the highest since the note was reintroduced in February 2009 after a 16-year hiatus. The notes drew a yield of 3.078 percent, compared with a forecast of 3.103 percent in a Bloomberg News survey of five of the Federal Reserve’s 18 primary dealers, companies that underwrite the U.S. debt. “The timing is perfect,” said William Larkin, a fixed- income portfolio manager in Salem, Massachusetts, at Cabot Money Management, which oversees $500 million. “We’ve gotten political turmoil in global markets. It looks like there’s the potential for a double dip in Europe.” Yesterday’s sale was the last of four auctions this week totaling a record $126 billion. Greece may have its sovereign rating lowered within months if it fails to meet the objectives in its plan to reduce its budget deficit, Pierre Cailleteau, managing director of sovereign risk at Moody’s Investors Service, said yesterday. Standard & Poor’s said Feb. 24 it may downgrade Greece. Government reports yesterday unexpectedly showed the number of Americans filing first-time jobless claims rose and orders for durable goods excluding transportation items fell. Existing Home Sales Existing home sales increased 0.9 percent to an annual pace of 5.5 million, rebounding from a 16.7 percent decline in December, according to a Bloomberg News survey before the National Association of Realtors reports the figure today. Bernanke said Feb. 24 that slack labor markets and low inflation will allow the Federal Open Market Committee to keep the benchmark lending rate, which has been in a range of zero to 0.25 percent for more than a year, low “for an extended period.” “I’m bullish for this year,” said Akira Furugori, who is in charge of investing in Treasuries in Tokyo at Sumitomo Life Insurance Co., which as equivalent of $224 billion in assets. “I don’t think the Fed will hike rates. Employment and consumption will be weak.” The difference between yields on 10-year notes and Treasury Inflation Protected Securities, or TIPS, a gauge of trader expectations for consumer prices, fell to 2.15 percentage points yesterday, the lowest level in two months. It has narrowed from as high as 2.49 percentage points in January. To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.

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