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Treasuries Head for Weekly Gain Before U.S. Production Report

Nov. 16 (Bloomberg) -- Treasuries headed for a fourth weekly gain before a central-bank report that economists said will show growth in industrial production slowed last month.

U.S. government securities were set to outperform corporate bonds on a monthly basis for the first time since May as the approach of the so-called fiscal cliff fueled demand for the safety of government debt. Israel’s Defense Minister Ehud Barak signaled his nation may escalate its military operations against Gaza, bolstering demand for safety. Volatility in Treasuries dropped to a five-year low yesterday.

“The economic data may be a little more mixed because uncertainty about the fiscal cliff is making consumers and investors reluctant to spend,” said Allan von Mehren, chief analyst at Danske Bank A/S in Copenhagen. “There’s been some nervousness over the fiscal cliff and that’s been supporting the Treasury market.”

The benchmark 10-year yield was little changed at 1.59 percent at 7:03 a.m. New York time, according to Bloomberg Bond Trader prices. The price of the 1.625 percent security due in November 2022 was at 100 10/32. The yield has declined two basis points this week.

Yields may stay at a range between 1.55 percent and 1.85 for the rest of the year, “with a risk that we could break to the downside,” Danske Bank’s von Mehren said.

U.S. government debt has returned 0.7 percent this month as of yesterday, versus a 0.2 percent loss for company bonds, Bank of America Merrill Lynch indexes show.

Industrial Production

Output at U.S. manufacturers, mines and utilities rose 0.2 percent in October from the previous month, half of September’s increase, according to the median projection of 84 economists surveyed by Bloomberg News before the Federal-Reserve report at 9:15 a.m. New York time.

Applications for jobless benefits climbed by 78,000 to 439,000 last week, the highest level since April 2011, the Labor Department said yesterday.

Egypt’s prime minister Hisham Qandil visited Gaza and said the Arab world was united behind Palestinians there, as Israel extended its aerial assault and militant groups kept up their barrage of rockets fired at the Jewish state.

U.S. bonds have been supported since President Barack Obama’s re-election on Nov. 6 as investors turned their attention to the fiscal cliff, the $607 billion of tax increases and spending cuts that will automatically come into force at the beginning of 2013 unless lawmakers act.

‘More Prudent’

“People are being a bit more prudent,” said Ali Jalai, who trades U.S. debt in Singapore at Scotiabank, a unit of Bank of Nova Scotia, one of the 21 primary dealers authorized to deal with the Fed. “They are worried about the fiscal cliff.”

Bank of America Merrill Lynch’s MOVE index, which measures price swings on Treasuries based on options, dropped to 55.6 yesterday, the lowest level since June 2007.

Yields show inflation expectations are falling.

The difference between yields on 10-year notes and same- maturity Treasury Inflation Protected Securities, a gauge of expectations for consumer prices over the life of the debt, has narrowed to 2.34 percentage points today, the least since Sept. 7. The average over the past decade is 2.18 percentage points.

The Fed’s preferred measure of inflation expectations, the five-year, five-year forward break-even rate, fell to 2.73 percent on Nov. 13, the most recent figure available in data compiled by Bloomberg, from 2.88 percent on Oct. 31.

Consumer Prices

Consumer prices increased 2.2 percent in October from the year before, the Labor Department reported yesterday. Inflation, as measured by this gauge, has averaged 2.5 percent over the past decade, after rising to as high as 14.8 percent in 1980.

The U.S. is scheduled to release its September report on overseas ownership of U.S. debt at 9 a.m. New York time today. Investors outside the nation hold $5.43 trillion of Treasuries, or about half the publicly traded debt, government data show.

The central bank plans to buy as much as $5.25 billion of Treasuries due from February 2021 to November 2022 today as part of its plan to lower borrowing costs, according to the Fed Bank of New York’s website.

Corporate bonds and stocks may draw investors once the fiscal cliff is resolved, said Jeffrey Rosenberg, New York-based chief investment strategist for fixed income at BlackRock Inc., the world’s biggest asset manager, overseeing $3.67 trillion.

“When that environment of uncertainty around the fiscal cliff clears, then I may want to go back into those asset classes,” he said Nov. 13 on Bloomberg Radio’s “The Hays Advantage’ with Kathleen Hays.

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