By Dakin Campbell and Lukanyo Mnyanda Oct. 22 (Bloomberg) -- Treasuries rose as a plunge in emerging-market assets and expectations of a worsening global slowdown boosted demand for the safety of government debt. U.S. bonds headed for a fifth month of gains as Argentina's planned seizure of $29 billion of private pension funds stoked concern it is headed for its second default in a decade. Bank of England Governor Mervyn King said the U.K.'s worst banking crisis since World War I probably will push the country into recession. The dollar rose to an almost two-year high against the currencies of six trading partners. Stocks fell. ``It's pretty much the overseas trade -- there are a lot of issues in emerging markets,'' said Tom Tucci, head of U.S. government bond trading in New York at RBC Capital Markets, the investment-banking arm of Canada's biggest lender. ``The dollar becomes a flight-to-quality trade.'' The yield on the 10-year note fell 9 basis points, or 0.09 percentage point, to 3.65 percent at 10:35 a.m. in New York, according to BG Cantor Market Data. The 4 percent security due in August 2018 advanced 23/32, or $7.19 per $1,000 face amount, to 102 28/32. The two-year note's yield slid 5 basis points to 1.57 percent. The Standard & Poor's 500 Index fell 3.2 percent. The MSCI Asia Pacific Index of regional shares plunged 5.1 percent, snapping a three-day rally, while Europe's Dow Jones Stoxx 600 Index declined 4.8 percent. Markets Still Roiled Evidence grew that the credit crisis that led to a U.S. economic slowdown is spreading. Hungary's central bank raised its benchmark interest rate by 3 percentage points today, to 11.5 percent, after a series of earlier measures to prop up its currency failed to halt the flight of investors from local assets. The last time Argentina sought to tap workers' savings to help finance debt payments was in 2001, just before it defaulted on $95 billion of obligations. The extra yield bondholders demand to buy developing-nation debt rather than U.S. Treasuries rose 63 basis points to 7.52 percentage points, the most since at least February 2003, according to JPMorgan Chase & Co. ``The widening of stress beyond the developed markets' banking system and economies is not exactly what we need right now,'' Padhraic Garvey, head of investment-grade debt strategy at ING Bank NV in Amsterdam, wrote in a client note. ``There has generally been a move away from risky assets and back into core safety, a theme that we expect to remain with us through to year-end at the very least.'' Speculation mounted that Europe's central banks will have to cut interest rates to spur economic growth, driving European bond prices higher. The yield on the German two-year note fell to the lowest level since January 2006. Dollar Rises The dollar rose 1.8 percent on the dollar index against the currencies of the U.K., euro-region, Japan, Sweden, Switzerland and Canada. It last reached this level on Nov. 6, 2006. The odds the Federal Reserve will lower its 1.5 percent target rate for overnight loans between banks by a half- percentage point at its meeting on Oct. 29 rose to 82 percent, futures contracts on the Chicago Board of Trade showed. The probability was 40 percent a week ago. Minneapolis Fed President Gary Stern said policy makers' actions have yet to calm financial markets. ``Restoration of stability has not yet been achieved,'' Stern, the longest-serving Fed policy maker, said yesterday in a speech in Escanaba, Michigan. The difference between the two-year notes yields and 10- year note yields shrank to 2.09 percentage points, from 2.12 percent yesterday, as 10-year notes outperformed two-year securities. `Already in Recession' The U.S. economy is getting worse, said Mickey Levy, chief economist at Bank of America Corp. in New York. ``We are already in recession'' in the U.S., Levy said in an interview yesterday. ``It's deepening. We're in the middle of a crisis in confidence.'' The U.S. central bank invoked emergency authority yesterday to provide up to $540 billion in loans to help relieve pressure on money-market mutual funds beset by redemptions. The program ``should improve the liquidity position of money-market investors,'' it said. Credit markets are starting to improve as the Fed adds dollars to the banking system, which will curtail demand for Treasuries, said Peter Jolly, head of markets research in Sydney at NabCapital, the investment-banking unit of National Australia Bank Ltd., the nation's largest lender. Two-year notes yield about 6 basis points more than the Fed's key rate. The spread has averaged about 24 basis points over the past decade. Libor Falls Banks' borrowing costs fell. The London interbank offered rate, or Libor, for overnight loans slid 16 basis points to 1.12 percent, the lowest level since June 2004, according to the British Bankers' Association. The difference between what banks and the Treasury pay to borrow money for three months, the so-called TED spread, narrowed for an eighth day, to 2.50 percentage points. Treasuries returned 0.8 percent this month, according to Merrill Lynch & Co.'s U.S. Treasury Master index. The Standard & Poor's 500 Index fell 35 percent this year, and credit market losses since the start of 2007 climbed to $659 billion, spurring demand for the safest assets. 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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