By Deborah Levine, MarketWatch NEW YORK (MarketWatch) -- Treasury prices fell Friday, sending yields up for a fourth straight session, amid concern that the government's continued initiatives to stabilize the flailing financial system will lead to more debt issuance, reducing the value of holding bonds. Two-year note yields ) rose 3 basis points, or 0.03%, to stand at 1.57%. Ten-year note yields ) also rose, up 8 basis points to 3.88%. Yields move inversely to bond prices. "We still have the looming threat of further supply pressure," said William O'Donnell, U.S. government bond strategist at UBS Securities, in a note to clients. UBS Securities estimates the federal deficit for fiscal 2009 will reach $1 trillion, which would represent "a veritable paradigm shift up" from the government's $163 billion deficit in fiscal 2007. Treasurys extended losses as stocks recovered in part from jaw-dropping lows set early in the U.S. session. The Dow Jones Industrial Average plunged nearly 700 points in the first few minutes of trading, then recovered into positive territory before again sliding into the red. See Market Snapshot. Investors may just be selling assets to raise cash amid uncertainty, said John Canavan, fixed-income analyst at Stone & McCarthy Research Associates. "There's a scramble to raise cash that is affecting every asset class," Canavan said. "Deleveraging seems to be a big factor here." The settlement of credit-default swaps related to the demise of Lehman Brothers , also was worse than some expected, traders said. Initial results from the auction indicate the recovery rate on Lehman's senior debt is about 10 cents on the dollar. Fed futures Interest-rate futures markets show traders still expect the Federal Reserve to lower its target interest rate at its meeting scheduled for the end of this month, even after a surprise cut this week to 1.5% from 2%. The gap between two-year and 10-year debt, charted on the so-called yield curve, increased to 2.28 percentage points, the widest since early 2004. A wider spread is one way investors express bets on rate reductions. Trading in the November futures contract shows a 66% chance that the Fed will reduce borrowing costs another half-percentage point at the end of this month. In addition, futures indicate a 58% probability that the target rate may drop to 0.50% by the end of the year, which would be the lowest since at least 1971. "They're trying to do anything at this point to improve the psychology and get anything working," Canavan said. "Will it unlock the markets and improve things? Not necessarily, certainly not quickly. The rate banks charge each other for short-term borrowing has risen sharply in the past month, pushing up the benchmark rate used by a wide swath of loans to consumers and companies. The London interbank offered rate for dollars has risen to about 4.82% Friday, up from 4.32% on Tuesday, before the fed cut intermeeting. It was about 2.82% up until about a month ago. The Securities and Financial Market Association recommends bond trading close at 2 p.m. Eastern on Friday and remain closed Monday for Columbus Day.

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