By Lukanyo Mnyanda and Wes Goodman Oct. 23 (Bloomberg) -- The difference in yield between two- and 10-year U.S. Treasuries narrowed to the least in two weeks on speculation the government will announce record auctions of shorter-dated securities to fund its $700 billion bank bailout. Demand for notes with shorter maturities waned even as U.S. stock futures fell and the declines in money-market rates slowed, signaling doubts a week-long thaw in bank lending will last. The U.S. may say today it will sell a record amount of notes to meet ``unprecedented financing needs,'' according to Wrightson ICAP LLC, an economic advisory firm. ``We've already seen a sharp rally in Treasuries and the market is taking a bit of a pause,'' said Niels From, chief analyst in Copenhagen at Nordea Bank AB, Scandinavia's biggest lender. ``The market is also focusing on supply and this is something that's going to keep yields higher than they would be otherwise.'' The spread between two- and 10-year Treasuries was at 208 basis points by 7:25 a.m. in New York, down from 209 basis points yesterday and from as high as 214 basis points at the beginning of the week. The two-year note yield was little changed at 1.51 percent, while the yield on the 10-year note dropped 2 basis points to 3.58 percent, according to BG Cantor Market Data. Bank losses and the prospect of an imminent recession are keeping investors ``bond positive,'' said From, who still recommends buying two-year notes as the Federal Reserve is likely to cut interest rates by 50 basis points by year-end. The chances that the Fed will lower its target rate for overnight bank loans by half a percentage point on Oct. 29 increased to 92 percent today, according to futures on the Chicago Board of Trade. The odds were 46 percent a week ago. Issuance Plans The Treasury will announce today that it plans to sell $38 billion of two-year notes on Oct. 28 and $27 billion of five- year notes on Oct. 30, according to Jersey City, New Jersey- based Wrightson. It will also auction $6 billion of five-year Treasury Inflation Protected Securities on Oct. 27, declining from $8 billion at the prior sale, the firm said. ``I'm bearish'' on Treasuries, said Satoshi Arai, chief portfolio investor at Toyota Asset Management Co. in Tokyo, a unit of Japan's largest automaker with $12 billion in assets. ``I'm worried about supply.'' The U.S. government had a record $455 billion budget deficit in the fiscal year ended Sept. 30 as financial-market strains slowed economic growth and spending rose. Morgan Stanley chief economist David Greenlaw predicts the shortfall may almost quadruple to about $2 trillion. Foreclosures The U.S. may spend $40 billion to help stem home foreclosures, the Wall Street Journal reported on its Web site Former Fed Chairman Alan Greenspan said job losses will increase. ``Given the financial damage to date, I cannot see how we can avoid a significant rise in layoffs and unemployment,'' Greenspan said in speech released by his office before he is scheduled to deliver it today. Initial jobless claims in the U.S. rose to 468,000 for the seven days ended Oct. 19 from 461,000 the week before, based on the median forecast in a Bloomberg News survey of economists before the Labor Department issues the report today. The number of people continuing to collect jobless benefits climbed to 3.715 million in the week ended Oct. 12, the most since June 2003, the survey showed. To contact the reporters on this story: Lukanyo Mnyanda in London at lmnyanda@bloomberg.net; Wes Goodman in Singapore at wgoodman@bloomberg.net.

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