Treasuries advanced, trimming a loss this month, as traders reduced bets on inflation in the U.S. economy for a second week. Demand declined at an auction of inflation-linked bonds yesterday, indicating investors don’t see a need to buy protection against rising prices in the economy. The difference between yields on 10-year notes and Treasury Inflation Protected Securities, a gauge of trader expectations for consumer prices, shrank to as little as 2.30 percentage points yesterday, the narrowest since Jan. 5. “The TIPS auction was pretty disappointing, suggesting some of the inflation fears in the market might be overdone,” said Nick Stamenkovic, a fixed-income strategist at RIA Capital Markets Ltd. in Edinburgh. “That’s clearly a supportive factor for Treasuries.” Benchmark 10-year yields dropped three basis points to 3.43 percent as of 10:31 a.m. in London, according to BGCantor Market Data. The 2.625 percent security due in November 2020 rose 7/32, or $2.19 per $1,000 face amount, to 93 3/8. The yield rose nine basis points this week and 13 basis points in January. The benchmark Stoxx Europe 600 Index of shares rose 0.6 percent, snapping two days of declines. The MSCI Asia Pacific Index fell 1.1 percent, dropping for a second day. The Thomson Reuters/Jefferies CRB Index of 19 commodities headed for a weekly loss. In Germany, two-year bond yields climbed, after business confidence unexpectedly rose to a record high in January as booming exports to Asia and stronger household spending bolstered growth in Europe’s largest economy. TIPS Demand The TIPS auction yesterday drew a yield of 1.17 percent, higher than the average forecast of 1.108 percent in a Bloomberg survey of nine primary dealers, companies obliged to bid at U.S. government debt sales. The bid-to-cover ratio, which gauges demand by comparing the amount offered with the amount sold, was 2.37, the lowest since April 2009. The sale was the largest 10-year TIPS offering since the U.S. began issuing inflation-indexed debt in 1997. “Analyst inflation expectations at least have not really been revised to the upside,” said Kornelius Purps, a fixed- income strategist at UniCredit SpA in Munich. “I see the largest risk with respect to the U.S. as that investors and analysts are becoming more bearish on inflation or optimistic on inflation so that here’s risk for further yield increases.” Indirect bidders, a category that includes foreign central banks, bought 37.9 percent of the notes, compared with 57.7 percent at the prior sale of the securities in November. Consumer Prices Consumer prices excluding food and energy rose 0.8 percent in December from the year before, the Labor Department said Jan. 14. The record low was 0.6 percent in October, the figures show. Wal-Mart Stores Inc., the world’s largest retailer, said yesterday it plans to cut prices to save customers about $1 billion a year on fresh fruit and vegetables. The U.S. economy is showing some signs of recovery following the recession that began in December 2007 and ended in June 2009. Sales of previously owned homes and an index of leading indicators exceeded forecasts yesterday. Ten-year yields have been in a 31 basis-point range since climbing to 3.56 percent on Dec. 16. If they’re able to push beyond last month’s high, they may advance to 3.70 percent, said Tomohisa Fujiki, an interest-rate strategist at BNP Paribas Securities Japan Ltd. in Tokyo. BNP’s U.S. unit is one of the 18 primary dealers. “There’s an improvement in the U.S. economy,” Fujiki said. “Things seem to be getting better.” Monthly Loss The Federal Reserve is trying to counter the slowdown in inflation by purchasing Treasuries to add $600 billion to the banking system. The central bank plans to scoop up $7 billion to $9 billion of securities maturing from February 2018 to November 2020 today as part of the program, according to its website. Treasuries and global bonds have both handed investors a 0.5 percent loss this month, according to Bank of America Merrill Lynch indexes. The MSCI All Country World Index of stocks has returned 1 percent. The cost of protecting Treasuries from losses using credit- default swaps was the highest in almost a year. The contracts climbed to 50.60 basis points yesterday, the most since Feb. 16, according to data provider CMA. Contracts on Treasuries are quoted in euros and a basis point on a contract protecting 10 million euros ($13.5 million) of debt from default for five years is equivalent to 1,000 euros annually. The swaps make a payment to the buyer if a borrower fails to adhere to its debt agreements. Traders also use them to speculate on bonds. To contact the reporter on this story: Lucy Meakin in London at lmeakin1@bloomberg.net To contact the editor responsible for this story: Daniel Tilles at dtilles@bloomberg.net

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