Treasury 10-year notes are posting the biggest gain to start the year in more than a quarter-century as investors snap up the highest yields among Group of Seven nations as central banks worldwide seek to avoid deflation.

U.S. debt rallied this month as the Federal Reserve took note of international economic weakness and repeated a pledge to stay “patient” on raising interest rates. Bond-buying plans by the European Central Bank led global efforts to spark inflation while driving down sovereign yields. Treasuries gained even as the Fed upgraded its assessment of the economy before report next week forecast to show another month of 200,000-plus U.S. jobs gains.

“The combination of slowing global growth and the signs of a slowdown in domestic economic growth caught the market off guard,” said Sean Simko, who oversees $8 billion at SEI Investments Co. in Oaks, Pennsylvania. “You’re not going to see long-end yields move higher from here.”

The benchmark 10-year note dropped 53 basis points this month to 1.64 percent in New York, the biggest decline in any January since 1988, according to Bloomberg Bond Trader prices. The 30-year bond yield reached an all-time low 2.22 percent Friday.

Market Positions

Hedge-fund managers and other large speculators reduced positions that profit from a decline in 10-year note to the least since November, U.S. Commodity Futures Trading Commission data showed. Net-short positions totaled 107,892 contracts as of Jan. 27.

While U.S. 10-year yields have plunged, they stand about 76 basis points higher than the average for their G-7 peers. Treasuries posted a fourth monthly gain as global investors sought U.S. yields that are higher than 18 developed nations.

“The flows are searching for any source of return,” said Jim Vogel, head of agency-debt research at FTN Financial in Memphis, Tennessee. “Treasuries stick out not because they are attractive, but because they are the least unappealing.”

Overseas demand was also reflected in auctions this week as the U.S. sold $90 billion in notes.

Debt Auctions

Indirect bidders, a class of investors that includes foreign central banks, purchased 56.1 percent of the seven-year auction. The bidders purchased 63.1 percent at the five-year sale.

“This idea of a rate differential between our securities and theirs is becoming enticing,” said Charles Comiskey, head of Treasury trading at Bank of Nova Scotia in New York, one of 22 primary dealers that are obligated to bid at U.S. government debt offerings. “There’s more room in the U.S. for yields to go lower.”

A sale two-year notes, often seen as most sensitive to changes in borrowing rates, drew a yield of 0.540 percent. A month earlier, the auction yield was 0.703 percent.

The Federal Open Market Committee said the U.S. expansion as “solid,” an improvement over the “moderate” performance it saw in December. The FOMC met Jan. 27-28.

The yield difference between two- and 30-year U.S. securities on Friday touched 1.75 percentage points, the least since 2008. Shorter-term yields are more sensitive to the outlook for Fed interest-rate targets, while longer-term debt tends to reflect projections for inflation.

Bullard View

Fed Bank of St. Louis President James Bullard said Friday investors are wrong to expect the Fed to postpone an interest- rate increase beyond midyear, with the U.S. economy leading global growth and unemployment dropping.

“The market has a more dovish view of what the Fed is going to do than the Fed itself,” Bullard said in an interview in New York. “Markets should take it at face value” from the Fed’s rate projections, and it’s “reasonable” to expect an increase in June or July.

U.S. employers added 235,000 jobs in January, according to the median estimate in Bloomberg News survey of economists, compared with an average month gain of 246,000 last year.

Gross domestic product grew at a 2.6 percent annualized rate after a 5 percent gain in the third quarter that was the fastest since 2003, Commerce Department figures showed Friday. Although U.S. growth trailed projections, it continues to outpace much of the developed world, which is threatened by recession and deflation.

Germany’s inflation rate turned negative in January for the first time in more than five years. Japanese inflation slowed in December more than economists forecast.

For the euro area as a whole, consumer prices slid 0.6 percent this month from a year earlier, matching the biggest decline in the history of the single currency. Deflation is a general drop in prices, which helps preserve the value of fixed- interest payments on bonds.

“The much-bigger intermediate trend is the amount of money flowing into the U.S. from overseas,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, which manages $61 billion in assets.