Treasuries rose for a second day, with 10-year yields headed for the biggest weekly drop since September, as $85 billion of spending cuts that threatened to slow the world’s largest economy were set to be triggered.

Ten-year notes extended gains from February as Chinese manufacturing growth slowed, the euro-area inflation rate dropped, and Italian bonds declined, boosting demand for the relative safety of U.S. debt. While U.S. consumer spending rose, incomes dropped by the most in 20 years, a report showed.

“No one knows how much time we have in terms of the resolution of this,” Sean Murphy, a trader at Societe Generale in New York, one of the 21 primary dealers that trade with the Federal Reserve, said of the U.S. spending cuts. “We have the potential to grind higher in prices with these concerns. There may be another 10 basis points of steam left.”

The 10-year yield fell two basis points, or 0.02 percentage point, to 1.85 percent at 9:16 a.m. New York time, leaving it 11 basis points lower this week, the biggest drop since Sept. 28, according to Bloomberg Bond Trader prices. The 2 percent note due in February 2023 gained 6/32, or $1.88 per $1,000 face amount, to 101 10/32. Thirty-year bond yields slid three basis points to 3.06 percent.

Ten-year yields will be at 1.85 percent on March 31 before rising to 2.30 percent by year-end, based on a Bloomberg survey of financial companies with the most recent projections given the heaviest weightings.

Higher Cost

Treasuries trimmed gains after Commerce Department data showed household purchases, which account for about 70 percent of the U.S. economy, rose 0.2 percent in January following a 0.1 percent gain the prior month. The median estimate in a Bloomberg survey of 76 economists called for a 0.2 percent advance. Incomes slumped 3.6 percent.

U.S. government securities rallied this week after an inconclusive Italian election and as Federal Reserve Chairman Ben S. Bernanke backed the central bank’s bond purchases.

The 10-year term premium, a model that includes expectations for interest rates, growth and inflation, reached negative 0.74 percent today, the most costly level since Jan. 23. A negative reading indicates investors are willing to accept yields below what’s considered fair value.

Treasury market volatility, as measured by the Bank of America Merrill Lynch MOVE index, declined yesterday to 55.9, the lowest since Jan. 24.

Volume Fell

Treasury trading volume dropped yesterday to $286 billion, the lowest level since Feb. 22, according to ICAP Plc, the largest inter-dealer broker of U.S. government debt. Daily volume reached $491 billion on Feb. 1, the highest since August 2011. The average daily volume for 2013 is $302 billion, compared with $238 billion in 2012.

Congress mandated $1.2 trillion in across-the-board spending cuts to begin today and be spread over nine years, as part of a 2011 agreement to increase the U.S. debt limit. Reductions totaling $85 billion are scheduled to take effect in the remaining seven months of this fiscal year.

China’s official Purchasing Managers’ Index was 50.1 in February, the weakest in five months and down from 50.4 in January, a report from the National Bureau of Statistics and China Federation of Logistics and Purchasing showed today in Beijing.

European Manufacturing

A gauge of manufacturing in the 17-nation euro area was below the 50 level that separates growth from contraction, London-based Markit Economics said today. The euro area’s annual inflation rate fell more than economists predicted in February, to 1.8 percent, according to separate data from the European Union’s statistics office in Luxembourg.

Italy’s 10-year yield rose six basis points to 4.79 percent today. The Stoxx Europe 600 Index fell 0.9 percent, and futures on the Dow Jones Industrial Average declined 0.3 percent.

Bernanke signaled in congressional testimony this week that the Fed is prepared to keep buying bonds at its present pace, as he dismissed concern that record easing risks sparking inflation or asset-price bubbles. The central bank purchases $85 billion of Treasury and mortgage debt a month, putting downward pressure on borrowing costs to fuel growth.

The Fed is scheduled to purchase as much as $1 billion in notes today maturing from August 2023 to February 2031.

Manufacturing in the U.S. expanded for a third month in February, according to the forecast in a Bloomberg survey of economists. The Institute for Supply Management’s factory index was 52.5, versus 53.1 in January, based on the survey before the report at 10 a.m. New York time. A number greater than 50 shows growth.