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Treasuries Head for Biggest Weekly Gain in Month on Rate Outlook

April 11 (Bloomberg) -- Treasuries headed for a weekly gain, with 10-year yields dropping the most in a month, after the Federal Reserve damped speculation policy makers are preparing to raise interest rates.

Exchange-traded funds that focus on U.S. government debt have attracted $117.8 million this month through yesterday, according to data compiled by Bloomberg. The funds had net outflows of $9.57 billion in March. Economists say a government report today will show producer prices rose at less than half the average pace for the past three years, evidence that the central bank has room to keep its benchmark interest rate near zero without spurring inflation.

“The support for Treasuries is consistent with factors including concerns surrounding the sustainability of the current pace of recovery and dovishness of the Fed,” said Orlando Green, a fixed-income strategist at Credit Agricole Corporate & Investment Bank in London. “The limited inflation pressure is also allowing Treasuries to rally. Although, we still see Treasuries as expensive at current levels given the fundamentals.”

The benchmark 10-year yield was little changed at 2.65 percent at 6:50 a.m. in New York, according to Bloomberg Bond Trader data. The price of the 2.75 percent note due in February 2024 was 100 29/32. The yield has declined eight basis points this week, the most since the period ended March 14.

The Standard & Poor’s 500 Index slumped 2.1 percent yesterday, the biggest drop in two months, helping drive demand for the relative safety of government debt.

Rate Outlook

The Bloomberg U.S. Treasury Bond Index has risen 0.5 percent this month as minutes of the Fed’s March meeting played down forecasts by some central bankers that rates may rise faster than they had predicted.

The gains are a reversal from March, when Fed Chair Janet Yellen suggested the central bank may raise borrowing costs in the middle of next year. The Treasury Bond Index dropped 0.3 percent last month.

“We are bullish on U.S. Treasuries,” Steven Major, head of global fixed-income research at HSBC Holdings Plc, said in an interview on Bloomberg Television’s “Countdown” with Mark Barton. “It’s very unlikely they will hike three times next year, maybe there will be no hikes next year,” he said referring to the Fed raising borrowing costs. “That’s why the market is reappraising the rate outlook.”

Ten-year yields may fall to 2.50 percent by June and 2.10 percent by year-end, Major said.

Bond Purchases

The Fed has kept its target for overnight bank lending in a range of zero to 0.25 percent since December 2008. The central bank is in the process of unwinding the bond-purchase program it has used to help support the economy.

The chance of an interest-rate increase to 0.5 percent or higher by January are about 10 percent, according to data compiled by Bloomberg.

Producer prices climbed 1.1 percent in March from a year earlier, based on a Bloomberg News survey of economists before today’s Labor Department report. The average over the past three years is 2.3 percent. Another report will show consumer confidence improved in April, based on a separate survey.

Import prices fell in March from a year earlier and the fewest Americans filed applications for unemployment benefits since May 2007, data showed yesterday.

“The economic data tell us that we don’t need any rate hikes,” said Hideo Shimomura, chief fund investor in Tokyo at Mitsubishi UFJ Asset Management Co., which has the equivalent of $78.8 billion in assets. The company has preferred Treasuries due in 10 years and longer since the start of 2014, he said.

To contact the reporters on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net; Eshe Nelson in London at enelson32@bloomberg.net To contact the editors responsible for this story: Paul Dobson at pdobson2@bloomberg.net Nicholas Reynolds, Naoto Hosoda

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