By Sandra Hernandez and Bo Nielsen Oct. 9 (Bloomberg) -- Treasuries fell for a third day as government sales of $50 billion in debt eased the shortage of U.S. securities sought as a haven amid economic turmoil. Traders pushed yields on two-year notes to the highest in almost a week as Treasury Secretary Henry Paulson signaled the government may invest in banks. The Treasury sold $20 billion of 10-year notes to relieve shortages, in the second round of special sales announced yesterday. It also will sell $30 billion of bills. ``A quick $20 billion on top of what came yesterday is going to weigh on the market a little bit,'' said Theodore Ake, the head of Treasury trading in New York at Mizuho Securities USA Inc., one of the 17 primary dealers that trade with the Federal Reserve. Yields on two-year notes increased 13 basis points, or 0.13 percentage point, to 1.68 percent at 11:53 a.m. in New York, according to BGCantor Market Data. They touched 1.74 percent, the highest since Oct. 3. The 2 percent security due September 2010 fell 8/32, or $2.50 per $1,000 face amount, to 100 19/32. The yield on the 10-year note rose 13 basis points to 3.78 percent. ``A massive amount of supply will be coming in the next six to eight weeks, and this will be the concentration for the market,'' said Sean Murphy, a Treasury trader and strategist in New York at RBC Capital Markets, the investment-banking arm of Canada's biggest lender. ``Anything else will take a back seat.'' U.S. Banks The Treasury is scheduled to sell two- and five-year notes and five-year Treasury Inflation Protected Securities in regularly scheduled auctions in the last week of October. It will announce upcoming borrowing needs in its quarterly refunding announcement on Nov. 5. As 10-year notes fell more than two-year notes earlier, the yield gap between the two securities touched 2.09 percentage points. It last ended the day above that level in 2004. The yield spread has also widened as a deepening credit crisis drove investors to the safety of short-term debt, driving down two- year note yields by about half a percentage point in the past two weeks. Paulson yesterday indicated the government may invest in banks as the next step in trying to resolve the seizure in credit markets. Legislation passed last week may be used beyond just buying mortgage-related assets on banks' balance sheets, he told reporters in Washington. Treasury Auctions U.S. debt declined yesterday after the Fed, European Central Bank, Bank of England, Bank of Canada and Sweden's Riksbank lowered their benchmark rates by a half-percentage point. Central banks in South Korea, Taiwan and Hong Kong cut interest rates today. The Treasury sold $20 billion of notes and $40 billion of bills yesterday to alleviate ``protracted shortages.'' It will sell bills at 1 p.m. today. The note sales are reopenings of previous auctions, meaning the securities sold today pay interest at the same rate and mature on the same date as their predecessors. ``In the Treasury market there are at least signs that the combined actions of the Fed and Treasury may be starting to take hold with yields moving higher,'' said Michael Pond, an interest-rate strategist in New York at the primary dealer Barclays Capital Inc. ``The fact that Treasury is now tapping old issues and clearly coming with a wave of supply is also having an impact on yields.'' TED Spread Treasury markets have been struggling with elevated numbers of transactions that don't settle properly, called failed trades or fails, in part because U.S. government securities have been in such high demand. The difference between what banks and the Treasury pay to borrow three-month money, the so-called TED spread, widened to 4.0 percentage points today, the most since Bloomberg began compiling the data in 1984, from 3.91 percentage points yesterday. It was 1.16 percentage points a month ago. 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. 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. `Expect Further Cuts' ``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 fall to 1.2 percent by the end of the year, he said. Futures contracts on the Chicago Board of Trade show an 86 percent chance the Fed will reduce its target rate for overnight lending between banks, now 1.5 percent, by a quarter-percentage point at its meeting on Oct. 29. The International Monetary Fund said the world's advanced economies will grow next year 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 expand 1.5 percent in 2009. The deepening economic slowdown is prompting traders to reduce their expectations for inflation. U.S. yields indicate they fell to the lowest in almost a decade yesterday. The difference between yields on 10-year Treasury Inflation Protected Securities, or TIPS, and regular notes was 1.1 percentage point. It touched 0.93 percentage point yesterday, the narrowest since January 1999. The so-called breakeven rate reflects the outlook among traders for consumer prices over the next 10 years. To contact the reporters on this story: Sandra Hernandez in New York at shernandez4@bloomberg.net; Bo Nielsen in Copenhagen at bnielsen4@bloomberg.net

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