By Wes Goodman Oct. 16 (Bloomberg) -- Treasuries were little changed, after 10-year yields rose half a percentage point in a month, on speculation the government will increase sales of longer-dated debt to pay for the rescue of the financial system. Government securities fell 0.2 percent so far in October, heading for their first monthly loss since May, according to Merrill Lynch & Co.'s Treasury Master index. The U.S. budget deficit will approach $2 trillion as the U.S. pays for its $700 billion bank-aid plan plus its bailout of American International Group, Fannie Mae and Freddie Mac, according to David Greenlaw, Morgan Stanley's chief economist. ``The money has to come from somewhere,'' said Hans Goetti, who oversees $10 billion in Asia as chief investment officer at LGT Bank in Liechtenstein (Singapore) Ltd., part of the bank for the wealthy owned by the royal family of Liechtenstein. ``That means more issuance of Treasuries over the next few years, which will put upward pressure on rates.'' The 10-year yield was 3.95 percent as of 1:44 p.m. in Tokyo, according to BGCantor Market Data. The price of the 4 percent security maturing in August 2018 dropped 1/32, or 31 cents per $1,000 face amount, to 100 13/32. The yield climbed from 3.43 percent on Sept. 16. Two-year yields rose 1 basis point to 1.55 percent. Debt Supply Ten-year notes may underperform shorter-term debt, with 10- year yields potentially reaching 4.17 percent, as investors anticipate increased supply ahead of the Treasury's Nov. 5 refunding announcement, said Martin Mitchell, head government bond trader at the Baltimore unit of Stifel Nicolaus & Co. ``The long end will continue to remain under pressure, particularly as we come to terms with the heavy Treasury financing calendar that is sure to come to fruition,'' Mitchell said yesterday. The difference between the two yields was 2.40 percentage points, close to the most since 2004. The U.S. yesterday reported a record budget deficit of $455 billion for the 12 months ended Sept. 30, compared with a $162 billion shortfall a year earlier and the previous high of $413 billion in 2004. The Treasury will be ``ramping up supply dramatically,'' Morgan Stanley's Greenlaw said in an interview on Oct. 8. President George W. Bush's administration said this week it plans to spend $250 billion buying stakes in financial firms to halt a credit freeze that sparked a global stocks rout. New Maturities Wrightson ICAP LLC in Jersey City, New Jersey, an economic advisory firm specializing in government finance, says the U.S. is likely to sell more debt to fund its bailout plan, along with more frequent auctions of 10-year notes, the reintroduction of three- and seven-year securities and increased sales of all maturities. Yields indicate banks are less willing to lend than they were last month. The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, widened to 4.34 percentage points from 1.15 percentage points six weeks ago. Treasuries offer safety from plunging stocks, said Satoshi Okumoto, a general manager in Tokyo at Fukoku Mutual Life Insurance Co., with $57.2 billion in assets. ``It's the last haven,'' he said ``The economy is going to collapse.'' The MSCI Asia Pacific Index of regional shares fell 7.3 percent, dropping for a second day. Japan's Nikkei 25 Stock Average tumbled 9.6 percent. South Korea's won slumped as much as 11 percent, the most since the International Monetary Fund bailed the nation out in 1997, after Standard & Poor's said it may cut credit ratings for Kookmin Bank and six other companies. Fed's Kohn Federal Reserve Vice Chairman Donald Kohn said the U.S. economy may not improve until late 2009. ``I see the most probable scenario as one in which the performance of the economy remains subpar well into next year and then gradually improves in late 2009 and 2010,'' Kohn said before the Georgetown University Wall Street Alliance in New York. Fed Chairman Ben S. Bernanke said government actions to stem the credit crisis won't immediately revive the economy. Consumer prices rose 0.1 percent in September, after falling by the same amount in August, based on the median forecast in a Bloomberg survey of economists before the Labor Department reports the figure today. Before August, the average monthly increase this year was 0.5 percent. The difference between rates on 10-year Treasury Inflation Protected Securities, or TIPS, and conventional notes was 0.98 percentage points, near the least in almost a decade, reflecting traders' outlook for consumer prices over 10 years. Futures on the Chicago Board of Trade show a 40 percent chance policy makers will reduce their 1.5 percent target rate by half a percentage point, as of late yesterday in New York. The odds were 8 percent the day before. The rest of the bets are for a quarter-point cut. The U.S. economy will shrink 0.3 percent in the fourth quarter, according to a Bloomberg survey of analysts. To contact the reporter on this story: Wes Goodman in Singapore at wgoodman@bloomberg.net.

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