Oct. 17 (Bloomberg) -- Treasuries rose, with 10-year notes paring a weekly loss, before a government report that economists said will show the U.S. housing slump deepened last month. Notes climbed after former Federal Reserve Vice Chairman Alan Blinder said the U.S. is at the start of a ``serious'' recession. Two-year securities are headed for a fifth monthly gain as traders added to bets the Fed will cut interest rates for a second time this month at its Oct. 29 meeting. ``The U.S. economy is in a recession and the risk of deflation will rise,'' said Hiromasa Nakamura, senior fund investor in Tokyo at Mizuho Asset Management Co., which oversees the equivalent of $39.3 billion. ``Yields will decline.'' Mizuho favors 10-year notes over those with a shorter maturity, he said. The yield on the 10-year note fell 3 basis points to 3.94 percent as of 1:41 p.m. in Tokyo, according to BGCantor Market Data. The price of the 4 percent security maturing August 2018 rose 6/32, or $1.88 per $1,000 face amount, to 100 1/2. A basis point is 0.01 percentage point. The yield climbed 6 basis points this week. Two-year yields rose 1 basis point today to 1.64 percent. The difference between the two narrowed to 2.30 percentage points from 2.39 percentage points on Oct. 15, which was the most since 2004. Housing starts fell 2.6 percent last month to an annual rate of 872,000, according to the median forecast in a Bloomberg News survey of 74 economists before the Commerce Department issues the figure today. An industry report may show consumer sentiment fell in October for the first time in four months, a separate Bloomberg survey showed. Housing Recession The U.S. housing recession increased defaults on subprime mortgages and led to a freezing of credit markets globally, pushing losses and writedowns at banks and securities companies to $660 billion since the start of 2007, according to data compiled by Bloomberg. ``We're in the early stages of a bad, old-fashioned recession, where consumers stop spending and therefore businesses stop hiring workers,'' Blinder said yesterday on Bloomberg Radio. ``It looks quite serious.'' The difference between rates on 10-year Treasury Inflation Protected Securities, or TIPS, which reflects the outlook among traders for consumer prices over the next 10 years, was 96 basis points, near the least in almost a decade. Futures on the Chicago Board of Trade show a 46 percent chance the Fed will reduce its target for overnight bank loans, now 1.5 percent, to 1 percent at its next meeting Oct. 29. The odds rose from zero percent a week ago. The rest of the bets are for a quarter-point reduction. Bill Yields Demand for some of the safest assets waned after Treasury Secretary Henry Paulson pledged to buy $250 billion of shares in the U.S.'s biggest banks. Three-year bill yields rose about a quarter percentage point this week to 0.43 percent, the first increase since the start of September. The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, narrowed to 4.08 percentage points from 4.64 percentage points at the end of last week. The cost of protecting bonds in Asia and the Pacific from default fell today. The Markit iTraxx Japan index of credit- default swaps declined 7 basis points to 2 percentage points, according to Credit Suisse Group AG. Credit-default swaps, which protect against or speculate on default, pay the buyer face value if a company fails to adhere to its debt agreements. Debt Supply Two-year notes, among the most sensitive to changes in interest rates, returned 0.9 percent this month, according to indexes compiled by Merrill Lynch & Co. They have the most potential to rise because interest-rate cuts will guide the yield down to 1 percent this year, said Hiroyuki Bando, chief manager for fixed income, equities and currencies in Tokyo at Mitsubishi UFJ Trust & Banking Corp., part of Japan's biggest bank. ``Two-year notes are the best value in the market now,'' Bando said. ``Forecasts on the economy aren't so good and we expect further rate cuts.'' Ten-year notes handed investors a loss of 0.7 percent, the Merrill indexes show, because of speculation the government will announce more debt sales to help fund its rescue of the financial system. President George W. Bush's administration said this week it plans to spend $250 billion of its $700 billion bank-rescue package buying stakes in financial firms to thaw a credit freeze that sparked a global stock rout. ``You have this dichotomy between knowing the economy's going to get worse so interest rates would come down, but you've got such a massive amount of supply coming,'' David Brownlee, who oversees $15 billion as head of fixed income at Sentinel Asset Management in Montpelier, Vermont, said yesterday. For Related News: Most-read news on U.S. bonds: MNI USB BN U.S. recession threat: STNI USRECESSION Top fund-related news: TFUN

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