U.S. Treasuries Head for Biggest Quarterly Gain in Five Years

Sept. 28 (Bloomberg) -- U.S. Treasuries headed for their biggest quarterly gain in five years on speculation slowing economic growth will lead the Federal Reserve to cut interest rates at least once more in 2007.

Government securities returned 3.8 percent since the end of June, based on an index compiled by Merrill Lynch & Co., as the central bank trimmed borrowing costs by a bigger-than-expected half percentage point this month. Former President Bill Clinton yesterday said the economy may be facing a recession.

``U.S. Treasury yields will fall,'' said Hiromasa Nakamura, who helps oversee the equivalent of $26 billion at Mizuho Asset Management Co. in Tokyo. ``The U.S. economy, especially the housing market, is declining.''

The benchmark 10-year yield was little changed at 4.57 percent as of 11:08 a.m. in Singapore, according to bond broker Cantor Fitzgerald LP. The price of the 4 3/4 percent note due in August 2017 fell 1/32, or 31 cents per $1,000 face amount, to 101 13/32.

The yield will decline to 4 percent in six months, said Nakamura, who has been betting on gains in Treasuries all year. A Bloomberg News survey of economists projects the yield will rise to 4.75 percent by the middle of 2008, with the most recent forecasts given the heaviest weightings.

`A Real Struggle'

The Treasury rally was triggered by a sudden surge in corporate borrowing costs tied to U.S. mortgage defaults among people with poor credit histories. Investors sought the relative safety of debt as the government said the economy lost jobs in August for the first time in four years and sales of new homes fell to the lowest in more than seven years.

``There is a real struggle most Americans are having to keep themselves afloat,'' Clinton said in an interview.

Interest-rate futures show most traders expect quarter-point rate cuts at the Fed's next two monetary policy meetings on Oct. 31 and Dec. 11.

The difference between two- and 10-year yields widened to 61 basis points from 44 basis points a month ago, indicating higher demand for shorter maturities, those most sensitive to what the central bank does with interest rates.

Gains today were limited before a Commerce Department report that economists said will show personal spending rose last month. The figure will show consumption hasn't been hurt as other parts of the economy slow, said Yasutoshi Nagai, chief economist at Daiwa Securities SMBC Co. in Tokyo. Consumption accounts for about 70 percent of U.S. gross domestic product.

``I recommend selling, especially short-term Treasuries, Nagai said. ``I don't think there will be a rate cut in October. U.S. economic growth will continue.''

The central bank lowered its target for the overnight lending rate between banks to 4.75 percent from 5.25 percent on Sept. 18, its first cut since June 2003.

Fed Governor Frederic Mishkin said inflation has come down. ``Tighter monetary policy and a commitment to price stability by central banks throughout the world have led to lower inflation,'' he said yesterday.

Mishkin, along with Fed officials Dennis Lockhart, Janet Yellen and William Poole, are scheduled to speak today.