By Wes Goodman and Dakin Campbell Oct. 9 (Bloomberg) -- Treasuries fell for a third day as Asian stocks gained and the U.S. prepared to sell $20 billion of debt in a second round of emergency auctions. The government plans to issue equal amounts of notes due in February 2015 and in February 2018 plus $30 billion of short- term bills today as it tries to relieve shortages caused by people hoarding Treasuries during the credit crunch. It auctioned $20 billion of notes and $40 billion of bills yesterday. ``There's no liquidity in the market,'' said Kei Katayama, who oversees $1.6 billion of non-yen debt as leader of the foreign fixed-income group in Tokyo at Daiwa SB Investments Ltd., part of Japan's second-biggest investment bank. ``No one wants to increase risk.'' The yield on the 10-year note rose 6 basis points to 3.71 percent as of 6:07 a.m. in London, according to BGCantor Market Data. The price of the 4 percent security due August 2018 fell 16/32, or $5 per $1,000 face amount, to 102 12/32. Yields on two-year notes increased 9 basis points to 1.65 percent. A basis point is 0.01 percentage point. The spread between two- and 10-year rates was 2.06 percentage points, narrowing from 2.10 percentage points yesterday, which was the most since 2004. ``People are so nervous about the financial crisis that they're holding on to their collateral and not lending it out,'' said Dominic Konstam, head of interest-rate strategy at Credit Suisse Securities USA LLC in New York, one of the 17 primary dealers that trade with the Federal Reserve. ``That obviously creates enormous stresses for trading Treasuries and unintended losses,'' he said yesterday. The MSCI Asia Pacific Index of regional shares rose 1.1 percent, after plunging 16 percent in the last five days. Rate Cuts Central banks in South Korea, Taiwan and Hong Kong cut interest rates today, a day after their counterparts in the U.S. and Europe coordinated monetary easing to stem the damage of the global financial crisis. The Fed, European Central Bank, Bank of England, Bank of Canada and Sweden's Riksbank yesterday reduced their benchmark rates by half a percentage point. The London interbank offered rate, or Libor, that banks charge each other for overnight loans climbed to 5.38 percent yesterday, the British Bankers' Association said. It was the second day the rate has increased by more than 100 basis points. `Further Cuts' Two-year notes, among the most sensitive to changes in interest rates, are the best bet in the Treasury market now, said Hideo Shimomura, chief fund manager at Mitsubishi UFJ Asset Management Co. in Tokyo. ``We favor short-term Treasuries,'' said Shimomura, who oversees $4 billion in non-yen bonds at the unit of Japan's largest bank. ``You can expect further cuts.'' Two-year yields will drop to 1.2 percent by year-end, he said. Futures contracts on the Chicago Board of Trade show an 82 percent chance the Fed will reduce its target for overnight bank loans, now 1.5 percent, by a quarter percentage point at its next meeting on Oct. 29. At Toyota Asset Management Co. in Tokyo, chief portfolio manager Satoshi Arai said he is avoiding U.S. 10-year notes because supply is increasing. Ten-year yields may rise to 4 percent over the next six months, and two-year rates will be little changed, said Arai, who oversees $12 billion at the firm. Financial companies worldwide have written down more than $592 billion in losses related to the credit crisis while policy makers try to unfreeze the funding markets. Three-month Libor rose to 4.52 percent yesterday, the most since Jan. 7. TED Spread The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, widened to 3.91 percentage points, the most since Bloomberg began compiling the data in 1984, compared with 1.16 percentage points a month ago. Britain became the latest government to bail out its banking system, announcing an unprecedented 50 billion-pound ($86 billion) government lifeline and emergency loans from the Bank of England. The International Monetary Fund said the world's advanced economies next year will grow at the slowest pace since 1982, easing inflation pressures and boosting unemployment. The median estimate of economists surveyed by Bloomberg News is for the U.S. economy to grow by 1.5 percent in 2009. Safety and Liquidity U.S. yields indicate inflation forecasts fell to the lowest in almost a decade yesterday. The difference between rates on 10-year Treasury Inflation Protected Securities, or TIPS, which reflects the outlook among traders for consumer prices, narrowed to 0.93 percentage points, the smallest spread since January 1999. ``The tightening of credit conditions has definitely spilled over into the real economy,'' said Wan-Chong Kung, who helps oversee $76 billion in fixed income as a bond fund manager at Minneapolis-based FAF Advisors, the asset-management arm of U.S. Bancorp. ``The fundamental rationale for rates and the curve is the continued need and desire for absolute safety and liquidity of Treasuries.'' To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.

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