By Wes Goodman Oct. 7 (Bloomberg) -- Treasuries fell for the first time in a week as Australia cut its benchmark interest rate by the most since 1992, spurring speculation the Federal Reserve and other central banks will follow. Notes slid, led by 10-year securities, as the MSCI Asia Pacific Index of regional shares rose 2 percent from its lows. The TED spread, which measures the difference between what banks and the Treasury pay to borrow for three months, dropped from a record. ``The market is still panicking but the main funding problem might be improving slightly,'' said Naruki Nakamura, a portfolio manager in Tokyo for Fischer Francis Trees & Watts Inc., part of BNP Paribas SA, which oversees more than $30 billion of debt. ``Treasury valuations are stretched.'' Fischer Francis reduced its holdings yesterday, Nakamura said. The yield on the 10-year note increased 7 basis points to 3.53 percent as of 7:41 a.m. in Tokyo, according to BGCantor Market Data. The price of the 4 percent security maturing in August 2018 dropped 20/32, or $6.25 per $1,000 face amount, to 103 28/32. Two-year yields rose 10 basis points to 1.53 percent. Australian central bank Governor Glenn Stevens cut the benchmark interest rate by 1 percentage point, twice as much as economists expected, to 6 percent, sending stocks higher. Ten- year bond yields fell as far as 4.94 percent, a level not seen since 2003. ``It's obvious there's a need for synchronized global rate cuts,'' said Rory Robertson, an economist at Macquarie Group Ltd. in Sydney. ``You've got the most savage tightening in financial markets in anyone's living memory.'' Central Banks Futures on the Chicago Board of Trade show a 58 percent probability the Fed will reduce its 2 percent target rate for overnight bank loans by three-quarters of a percentage point to 1.25 percent at its Oct. 29 meeting. Traders saw no chance of a cut of that magnitude a month ago. The odds of a half-point reduction are 42 percent. The difference between two- and 10-year yields was 2.02 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 cuts. The European Central Bank is scheduled to meet on Nov. 6 and U.K. central bankers are forecast to cut rates on Oct. 9. The MSCI Asia Pacific Index slid 1.2 percent, after falling more than 3 percent. In U.S. trading, the Standard & Poor's 500 Index dropped 8.3 percent before climbing back to end with a 3.9 percent loss. TED Spread Narrows The TED spread, or the difference between what banks and the Treasury pay to borrow money for three months, narrowed to 3.69 percentage points from 3.82 percentage points. It declined from 3.87 percentage points at the end of last week, the most since Bloomberg began compiling the data in 1984. Rates on three-month bills increased 13 basis points to 0.60 percent, and they rose from 0.02 percent on Sept. 17. U.S. bills are seen as among the most secure investments because of their short maturities. An index of emerging-market bonds compiled by JPMorgan Chase & Co. yielded 4.93 percentage points more than Treasuries, narrowing from 5.01 percentage points. Yesterday's spread was the most since 2004. Damage from the credit crunch accelerated over the past month as Lehman Brothers Holdings Inc. and Washington Mutual Inc. collapsed, the U.S. government took control of Fannie Mae, Freddie Mac and American International Group Inc., and Merrill Lynch & Co. and Wachovia Corp. were purchased by rivals. Bernanke Speech ``Fear and unease are growing on a daily basis,'' said Mark MacQueen, partner and portfolio manager in Austin, Texas, at Sage Advisory Services Ltd., which oversees $6.5 billion. ``There is a complete lack of liquidity in all markets except U.S. Treasuries. With the weak stock market combined with the bad global outlook, Treasuries have a huge fear bid,'' MacQueen said yesterday. Fed Chairman Ben S. Bernanke is scheduled to speak on the economy today. Treasury Secretary Henry Paulson has consulted with Bernanke, New York Fed President Timothy Geithner and reached out to Wall Street executives, Treasury spokeswoman Brookly McLaughlin said yesterday, as officials consider ways to unfreeze the credit markets. To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.

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