By Wes Goodman Oct. 6 (Bloomberg) -- Treasuries rose for a fourth day, sending two-year notes to their longest winning streak in six weeks, as stocks fell and European bank rescues added to evidence a global credit crunch is deepening. Yields slid to a two-week low as UBS AG, the largest Swiss bank, said the Federal Reserve will halve its benchmark interest rate to 1 percent by March 31 to combat a recession. Germany's government and financial institutions agreed a 50 billion euro ($68 billion) rescue package for Hypo Real Estate Holding AG and BNP Paribas SA joined a state-backed bailout of Fortis, Belgium's largest financial services company. ``It's time to start buying'' Treasuries, said Hiroyuki Bando, chief manager for fixed income, equities and currencies in Tokyo at Mitsubishi UFJ Trust & Banking Corp., part of Japan's biggest bank. ``The economy will become weaker. Interest rates will go lower.'' Two-year note yields fell 9 basis points, or 0.09 percentage point, to 1.5 percent as of 7:30 a.m. in London, according to BGCantor Market Data. That's the lowest since Sept. 18. The price of the 2 percent security maturing in September 2010 rose 5/32, or $1.56 per $1,000 face amount, to 100 31/32. Ten-year yields dropped 8 basis points to 3.53 percent. The difference between two- and 10-year yields widened to 2.03 percentage points, the most since March. Yields on two-year notes, more sensitive to changes in interest rates because of their shorter maturities, are falling faster than longer-term rates as traders add to bets for Fed rate cuts. The MSCI Asia Pacific Index of regional shares slid 3.9 percent, headed for the lowest close since July 2005, and the U.S. Standard & Poor's 500 Index futures dropped 2.1 percent. Tumbling global stocks are helping steer investors toward the relative safety of government debt. Fed Odds Increase ``We will be dealing with a sluggish economy, at best, for quite some time,'' former Treasury Secretary Lawrence Summers said yesterday in Washington. UBS cut its forecast for global growth next year to 2.2 percent from 2.8 percent, economists led by Larry Hatheway in London wrote in a report yesterday. ``We now believe the world economy faces a recession,'' said UBS, one of the 17 primary dealers of U.S. government securities that trade with the Fed. Japan's 10-year bonds advanced, pushing yields to the lowest in almost three weeks, as traders added to bets the central bank will reduce interest rates. The yield on the 1.5 percent bond due in September 2018 declined 7 basis points to 1.375 percent. Ten-year yields slid 17 basis points in Australia and 15 basis points in Singapore. Fed Rate Cut Futures on the Chicago Board of Trade show an 84 percent probability the Fed will slash its benchmark interest rate by a half-percentage point at its Oct. 29 meeting. Traders saw no chance of a cut a month ago. The odds of a 75-basis-point reduction are 16 percent. Ten-year yields on Treasuries will climb to 3.8 percent by year-end, strategists led by Ajay Rajadhyaksha in New York at Barclays Capital Inc. wrote in a report today. Rising debt sales will push longer-term rates higher, Barclays, another primary dealer, said in the report. The two-year rate has reached Barclays' 1.5 percent target. The rescue plans for Fortis and Hypo Real Estate come after leaders of Europe's four biggest economies met on Oct. 4 and agreed to ease accounting rules and seek tougher financial regulations to counter the financial slowdown. While the U.S. Congress passed a $700 billion financial- market bill designed to unlock credit markets, the plan may do little to stem job losses, spur manufacturing or boost consumer confidence, strategists and economists at Dresdner Kleinwort and JPMorgan Chase & Co. say. They advise buying two-year notes, though yields are already below the federal funds rate. `More Bullish' ``We are more bullish,'' said Kevin Logan, senior market economist in New York at Dresdner, another primary dealer. ``Not only has the economy evolved in the way we thought it would, but obviously we have the financial crisis.'' Logan lowered his year-end yield forecast in mid-September to 1.45 percent from 1.7 percent. Two-year notes yielded 50 basis points less than the fed funds rate, the biggest deficit since April. JPMorgan, a primary dealer, expects two-year yields to decline to 1.40 percent by January. Investors are less bearish on U.S. government securities, according to an index from Jersey City, New Jersey-based Ried, Thunberg & Co. The measure of money manager sentiment toward Treasuries through the end of December rose to 46 for the seven days ended Oct. 3 from 40 the week before. Readings below 50 indicate investors expect bonds to decline. Ried surveyed 30 fund managers overseeing $1.5 trillion. Money Market Treasuries headed for a fifth straight monthly gain in October as $586 billion in credit losses led investors to seek the safest securities. Government debt returned 1.2 percent since Sept. 30, beating last month's gain of 0.66 percent, according to Merrill Lynch & Co.'s U.S. Treasury Master index. Government debt gained 1 percent in Germany and 0.2 percent in Japan this month, Merrill indexes show. Yields indicate banks are less willing to lend. The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, widened to 3.87 percentage points, the most since Bloomberg began compiling the data in 1984. To contact the reporters on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.

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