The $10 trillion market for U.S. Treasuries is signaling thatthe economic recovery may be poised to weaken even as consumerconfidence rises toward pre-recession levels.

Yields on 10-year Treasury notes, the benchmark for everythingfrom mortgage rates to corporate bonds, fell as low as 1.89 percentyesterday, down from this year's high of 2.09 percent on Jan. 23,according to data compiled by Bloomberg. The yield averaged 2.76percent in 2011 and 3.19 percent in 2010.

The jobless rate has fallen to the lowest since February 2009,and the Conference Board said its gauge of consumer sentiment isthe highest level in a year. Bond investors are focused on Europe'ssovereign-debt crisis, oil prices that exceed $100 a barrel againand home prices that have dropped to the lowest level since2003.

“You have an economy that's not yet firing on all cylinders,”Ira Jersey, an interest-rate strategist in New York at CreditSuisse Group AG, one of primary dealers that are required to bid atTreasury auctions, said yesterday in a telephone interview. “Themarket is telling you that the economy's not strong enough togenerate an inflationary spiral.”

The Federal Reserve lowered in January its projected range forgrowth this year to 2.2 percent to 2.7 percent, from 2.5 percent to2.9 percent in November. The range for next year is 2.8 percent to3.2 percent, down from a previous forecast of 3 percent to 3.5percent. The median estimate of economists surveyed by BloombergNews is for growth of 2.4 percent, down from 2.5 percent in aJanuary survey.

While those rates of expansion would still be up from the 1.7percent recorded in 2011, they're below the average of 3.1 percentin 2004 through 2006, before the start of the biggest financialcrisis since the Great Depression.

Strategists are lowering their yield forecasts. The medianend-of-2012 estimate for 10-year Treasury yields has fallen to 2.45percent from 2.72 percent in November, according to a survey ofmore than 70 economists and strategists surveyed by Bloomberg.Credit Suisse sees them at 2.25 percent.

“If you take the capital spending piece out of the U.S. economyequation, you're left with a consumer muddling along with modestgrowth,” Rob Robis, head of fixed-income macro strategies inAtlanta at ING Investment Management, which manages about $160billion, said yesterday in a telephone interview. Falling capitalexpenditures “is very worrisome if this translates to a broadertrend,” he said.

Orders Tumble

Orders for durable goods fell in January by the most in threeyears. Bookings for goods meant to last at least three yearsslumped 4 percent, after a revised 3.2 percent gain the priormonth, data from the Commerce Department showed yesterday inWashington. Economists projected a 1 percent decline, according tothe median forecast in a Bloomberg News survey.

The yield on the benchmark 10-year note rose two basis pointsyesterday, or 0.02 percentage point, to 1.95 percent in New York,according to Bloomberg Bond Trader prices. The price of the 2percent security due in February 2022 fell 5/32, or $1.56 per$1,000 face amount, to 100 1/2. Ten-year notes yielded 1.94 percenttoday as of 7:17 a.m. in New York.

Even as confidence among U.S. consumers as measured by the NewYork-based Conference Board's index climbed more than forecast to a12-month high in February, the S&P/Case-Shiller index ofproperty values in 20 cities fell 4 percent from a year earlier,reports showed yesterday.

Gross domestic product also faces potential headwinds fromhigher taxes if the George W. Bush cuts are allowed to expire, aswell as spending reductions that were triggered as part of thegovernment's deal to raise the debt limit last year, said AjayRajadhyaksha, an analyst and managing director at Barclays Plc inNew York. The reduction in fiscal stimulus may lop as much as 5percentage points from GDP growth, he said.

“By the end of this year we have a lot of potential fiscaltightening,” Rajadhyaksha said in a Feb. 27 telephone interview.“Congress will probably find its way out of some of these automaticcuts that are coming, but it might not find its way out of all ofthem.”

Tame inflation and demand for the safest assets amid Europe'ssovereign-debt crisis helped propel returns on Treasuries to 10percent, including reinvested interest, in the 12 months ended Jan.31. Last year's gain of 9.8 percent, as measured by Bank of AmericaMerrill Lynch indexes, beat the 2.1 percent rise in the Standard& Poor's 500, including dividends.

Forward Rates

Traders are betting that government debt yields will remainsubdued. The cost to exchange fixed-for floating-rate payments in adecade has averaged 3.41 percent this year. The so-called forward10-year swap rate, which has fallen from last year's peak of 5.47percent in February, is trading at the same levels as early 2009during the depths of the financial crisis.

Europe's debt crisis, geopolitical risk in the Middle East andthe potential for more Fed easing are other reasons why Treasuryyields have failed to rise, said David Ader, head of U.S.government bond strategy at CRT Capital Group LLC in Stamford,Connecticut.

That combination “freezes positions” Ader said in a Feb. 27telephone interview.

The World Bank reduced its global growth forecast for this yearto 2.5 percent, from a June estimate of 3.6 percent, theWashington-based institution said Jan. 18. It warned that thecrisis in Europe and slower growth in developing economies maycrimp the global economy further.

After its Jan. 24-25 meeting, the Federal Open Market Committeesaid subdued inflation and slack in the economy are likely towarrant keeping the target rate in a range of zero to 0.25 percentuntil at least through late 2014, extending a previous date ofmid-2013 or later. Policy makers also set an explicit inflationgoal of 2 percent for the first time.

After buying $2.3 trillion of Treasury and mortgage-relatedbonds from 2008 to June 2011 to stimulate the economy, Fed ChairmanBen S. Bernanke said after the January meeting that policy makersare considering another set of purchases. Bernanke is scheduled toappear today before the House Financial Services Committee forsemi-annual testimony to explain the Fed's monetary policy and theoutlook for the economy.

Rather than adding to inflation, traders see oil prices hoveringat about $100 a barrel, almost 60 percent above the average priceof $64 for the past decade, as being a drag on the economy. Anextended $10 rise in oil cuts 0.5 percentage point off U.S. growthover two years, according to Deutsche Bank AG.

'Drain' on Incomes

“That's a drain on household incomes,” said Robis of ING. “Yousee higher oil prices, and it could have an impact on consumer andbusiness confidence.”

Inflation has stayed contained in part because wage growth isstunted even as unemployment recedes. Average hourly earnings rose1.9 percent in January from a year earlier, the smallest increasesince April, and down from 3.2 percent in 2008 and 3.7 percent inJanuary 2009, the Labor Department said Feb. 3. The jobless ratefell to 8.3 percent in January, the lowest level in three years,compared with a high of 10 percent in October 2009.

Inflation as measured by the personal consumption expendituresindex, excluding food and fuel, the measure used by the Fed for itsforecasts, rose 1.8 percent in December from a year earlier. That'sdown from 2.5 percent as recently as 2008.

“There's enough out there to be encouraged, but not an awful lotto get excited about with the U.S. economy,” David Glocke, whomanages $65 billion of Treasuries at Vanguard Group Inc. in ValleyForge, Pennsylvania, said yesterday in a telephone interview. “Longstory short, there's not a lot to go out and push rates higher atthis point.”

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