By Dakin Campbell and Lukanyo Mnyanda Oct. 20 (Bloomberg) -- Treasuries fell as stocks rose after South Korea and the Netherlands joined a global effort to shore up the financial system, damping demand for the safest assets. Two-year notes led the drop as the MSCI World Index of stocks extended its biggest weekly gain since 2003. The London interbank offered rate, or Libor, that banks charge each other for three-month loans in dollars fell the most in nine months as policy makers worldwide made cash available to banks to revive credit markets. ``Stocks being up is leading to a bit of selling, as is Libor resetting lower and some signs that the freezing up of the funding system might be reversing to some degree,'' said Martin Mitchell, head government bond trader at the Baltimore unit of Stifel Nicolaus & Co. ``That's helping to pressure the market.'' The yield on the two-year note rose 5 basis points, or 0.05 percentage point, to 1.66 percent at 8:44 a.m. in New York, according to BGCantor Market Data. The 2 percent security maturing September 2010 fell 3/32, or 94 cents per $1,000 face amount, to 100 20/32. The 10-year yield increased 2 basis points to 3.95 percent. The yield difference between the two- and 10-year notes shrank to 2.29 percentage points, from 2.31 percentage points on Oct. 17, as demand for safer, shorter-dated debt waned. Rates on three-month bills gained 6 basis points to 0.85 percent after rising 61 basis points last week. Ten-year notes are headed for their first monthly loss since May, according to Merrill Lynch & Co.'s U.S. Treasury Master Index. `Path to Recovery' ING Groep NV said yesterday it will get 10 billion euros ($13.4 billion) from the Netherlands' government. South Korea said it will guarantee $100 billion of lenders' foreign-currency debt and provide them with $30 billion in U.S. dollars. European Central Bank President Jean-Claude Trichet said in an interview on French radio yesterday policy makers have put banks ``on the path to recovery'' by pumping record amounts of cash into money markets and he urged financial companies to start lending again. The MSCI World Index climbed a second day, gaining 1 percent. Futures on the Standard & Poor's 500 Index expiring in December advanced 2.4 percent. Losses in Treasuries may be limited on speculation Federal Reserve Chairman Ben S. Bernanke will reiterate concern today that the U.S. economic slowdown may be prolonged, according to Barclays Capital Japan Ltd. He will testify before the House Budget Committee on the economic outlook and financial markets at 10 a.m. in Washington. Economic Outlook ``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. The median forecast of analysts surveyed by Bloomberg calls for the 10-year yield to be 3.61 percent and the two-year 1.66 percent by year-end. HSBC Securities USA Inc., one of the 17 primary dealers that trade directly with the Federal Reserve, said policy makers may cut their target rate to zero by the middle of next year as the economy lapses into a recession. Gross domestic product will contract for three straight quarters, HSBC said in a note today. Futures on the Chicago Board of Trade showed a 46 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. The odds were 14 percent a week ago. The rest of the bets were for a quarter-point reduction. Inflation Expectations Bonds that protect against faster inflation may be the biggest bargain in the Treasury market even as gains in consumer prices slow. 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. ``While the economic outlook we're facing is severe, we do not expect the western economies to slump into a Japanese-style deflation,'' Luca Cazzulani and Giuseppe Maraffino, bond strategists in Milan at UniCredit Markets & Investment Banking, a unit of Italy's largest bank, wrote in a client note. Current levels ``appear very attractive.'' Bearish Sentiment Investors remained ``bearish'' on Treasuries, according to Ried, Thunberg & Co.'s weekly money-manager sentiment survey. Its end-of-December index was at 42 for the week ended Oct. 17, unchanged from the previous week, the poll of 28 fund managers controlling $1.4 trillion in assets showed. A reading below 50 indicates investors are bearish. Bonds also fell as money markets showed signs of thawing. Libor for three-month loans in dollars fell by 36 basis points, the most since January, t0 4.06 percent, according to the British Bankers' Association. The overnight rate fell to 1.51 percent, the lowest level since August 2004. The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, was dropped 38 basis points to 3.25 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 reporters on this story: Dakin Campbell in New York at dcampbell27@bloomberg.net; Lukanyo Mnyanda in London at lmnyanda@bloomberg.net

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