By Ron Harui Oct. 20 (Bloomberg) -- Treasuries fell, with two-year notes erasing last week's gain, as South Korea and the Netherlands joined a global effort to shore up the financial system, pushing Asian stocks higher. U.S. government debt has lost 1.4 percent in two weeks as governments worldwide made cash available to banks and added funds to unlock credit. Money-market rates and the cost to protect Australia corporate bonds from default dropped as South Korea said it will guarantee $100 billion of lenders' foreign- currency debt and provide $30 billion in U.S. dollars to banks. ``Financial-market supportive steps are steadily coming out and may help avert a crisis,'' said Takashi Yamamoto, chief trader at Mitsubishi UFJ Trust & Banking Corp. in Singapore, a unit of Japan's largest publicly listed bank. ``Treasuries are being sold a bit.'' The yield on the two-year note rose 7 basis points, or 0.07 percentage point, to 1.68 percent at 6:12 a.m. in London, according to BGCantor Market Data. The price of the 2 percent security maturing in September 2010 fell 4/32, or $1.25 per $1,000 face amount, to 100 19/32. Two-year yields may move between 1.4 percent and 1.9 percent this week, Yamamoto said. Ten-year yields increased 3 basis points to 3.97 percent. Notes headed for their first monthly loss since May, according to Merrill Lynch & Co.'s U.S. Treasury Master Index. The yield difference between the two notes shrank to 2.26 percentage points, from 2.31 percentage points on Oct. 17, as demand for shorter-dated debt, deemed the safest assets, waned. Rates on three-month bills were unchanged at 0.79 percent after rising 21 basis points last week. `More Optimistic Tone' ING Groep NV said yesterday it will get 10 billion euros ($13.4 billion) from the Netherland's government while European Central Bank President Jean-Claude Trichet urged banks to start lending again after pumping record amounts of cash into the money market. ``We've seen a more optimistic tone generally emerge in the financial sector,'' said Adam Donaldson, head of debt research in Sydney at Commonwealth Bank of Australia, the nation's second- largest lender. ``Yields will probably head a little higher over the next day or so.'' The MSCI Asia-Pacific index of regional shares climbed 3 percent for a second day of gains and U.S. stock futures rose. Losses in Treasuries may be limited on speculation Federal Reserve Chairman Ben S. Bernanke will reiterate today concern that the U.S. economic slowdown may be prolonged, according to Barclays Capital Japan Ltd. Bernanke Testifies ``Bernanke's outlook on the economy may not be good,'' said Minako Iida, strategist for non-yen debt at Barclays Capital in Tokyo, a unit of the U.K.'s second-biggest bank. ``It's likely to be supportive of Treasuries.'' Barclays forecast the 10-year yield will decline to 3.80 percent and the two-year yield will fall to 1.50 percent by year- end, Iida said. Bernanke will testify at the House Budget Committee on the economic outlook and financial markets at 10 a.m. in Washington. Futures on the Chicago Board of Trade on Oct. 17 showed traders saw a 38 percent chance the Fed will cut its target rate for overnight bank loans by a half-percentage point to 1 percent at its Oct. 29 meeting from 1.5 percent. The odds were 28 percent a week earlier. The rest of the bets were for a quarter-point reduction. Bonds that protect against faster inflation may be the biggest bargain in the Treasury market even as gains in consumer prices slow. BlackRock, Brown Brothers Treasury Inflation-Protected Securities fell 7.85 percent since June as investors shunned all but the most easily traded debt amid the seizure in credit markets. TIPS were the only part of the U.S. government bond market to lose money in that time as Treasuries of all maturities gained 2.11 percent, according to Merrill Lynch indexes. BlackRock Inc., Brown Brothers Harriman & Co., DWS Investment GmbH and New Century Advisors are buying the securities because inflation will likely increase at a faster pace over the next decade than the 1 percent annual rate TIPS yields suggest. Treasuries weakened today as the efforts of governments and central banks worldwide helped restore investor confidence. The U.S. and other nations have agreed to spend almost $3 trillion to rescue banks imperiled by the credit crisis. Bearish Sentiment Investors remained ``bearish'' on Treasuries, according to Ried, Thunberg & Co.'s weekly money manager sentiment survey. The end-of-December index was at 42 for the week ended Oct. 17, unchanged from the previous week, the survey showed. Twenty eight fund managers controlling $1.4 trillion in assets were surveyed. ``The Dutch are coming through and buying into ING and together with what we got out of Korea really just shows that all governments around the world are in crisis-management mode and they're actually doing the right thing,'' Jesper Koll, Tokyo- based director of hedge fund Tantallon Research Japan, said in an interview with Bloomberg Television. The cost of protecting Australian corporate bonds from default declined, credit-default swaps showed. The Markit iTraxx Australia index was quoted 25 basis points lower at 220, down from a trade at 245 late on Oct. 17, according to Citigroup Inc. The benchmark, which declines as perceptions of credit quality improve, is tied to the debt of 25 companies including Qantas Airways Ltd. and BHP Billiton Ltd. Money markets showed signs of thawing. The London interbank offered rate, or Libor, for borrowing in dollars for three months, fell for a fifth day on Oct. 17, declining 8 basis points to 4.42 percent. Hong Kong's three-month Hibor dropped by the most since 1999 after the central bank added funds. The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, fell 1 percentage point last week to 3.63 percentage points. It was 4.64 points on Oct. 10, the most since at least 1984 when Bloomberg started compiling the data. To contact the reporter on this story: Ron Harui in Singapore at rharui@bloomberg.net

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